International Paper Company Annual Report 1999

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FY1999 Annual Report · International Paper Company

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International Paper:
From Innovation to Results

O U R 1 9 9 9 A N N U A L R E P O R T

F I N A N C I A L H I G H L I G H T S

Dollar amounts and shares in millions, except per share amounts

1 9 9 9

1 9 9 8

F I N A N C I A L S U M M A R Y

Net Sales

Operating Profit

Earnings Before Income Taxes, Minority Interest and Extraordinary Item

Net Earnings

Total Assets

Common Shareholders’ Equity

Return on Investment

P E R S H A R E O F C O M M O N S T O C K

Earnings Before Extraordinary Item

Earnings – Assuming Dilution

Cash Dividends

Common Shareholders’ Equity

S H A R E H O L D E R P R O F I L E

Shareholders of Record at December 31

Shares Outstanding at December 31

Average Shares Outstanding

$24,573

$23,979

1,810 1

1,375 1

448 2

183 2

30,268

10,304

429 3

247 3

31,466

10,738

2.6%

2.5%

$0.48 2

0.44 2

1.01 4

24.95

$0.60 3

0.60 3

1.05 4

26.13

32,881

31,050

414.6

413.0

413.2

411.0

1 See the operating profit table on page 30 for details of operating profit by industry segment. Results of equity investees are not included in operating profit.

2 Includes a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for one-time
merger expenses, a $298 million pre-tax charge ($180 million after taxes and minority interest expense) for asset shutdowns of excess internal capacity and cost reduction actions, a $10
million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18
million after taxes) to increase existing legal reserves and a $36 million pre-tax credit ($27 million after taxes) for the reversal of reserves that were no longer required. Return on invest-
ment was 4.0% before these items.

3 Includes a $20 million pre-tax gain ($12 million after taxes) on the sale of the Veratec nonwovens business, an $83 million pre-tax gain ($50 million after taxes) from the reversal of previ-
ously established reserves that are no longer required, a $111 million pre-tax charge ($68 million after taxes) for the impairment of oil and gas reserves due to low prices, a $145 million
pre-tax restructuring and asset impairment charge ($82 million after taxes and minority interest expense) and $16 million of pre-tax charges ($10 million after taxes) related to our share
of charges taken by Scitex, a 13% investee company, for the write-off of in-process research and development related to an acquisition and costs to exit the digital video business. Return
on investment was 2.8% before these items.

4 The International Paper dividend was $1.00 per share in 1999 and 1998. However, dividends on a per share basis have been restated to include dividends paid by Union Camp

Corporation which merged with International Paper during 1999 in a transaction accounted for as a pooling-of-interests.

T O O U R S H A R E H O L D E R S

To International Paper Shareowners: Two major events stand out as milestones for
International Paper during 1999: our announcement of a powerful profit improve-
ment program that will guide our decisions and actions through 2002 and beyond;
and, the completion of our merger with Union Camp Corporation, the most signifi-
cant in the history of International Paper.

We intend to improve our operating profits across our businesses by at least
$1.8 billion by the end of 2002 before the benefits we get from price increases. As
a result, we expect our return on investment will increase by 400 basis points.
I am confident this program, coupled with our ongoing efforts to better

involve our people, strengthened focus on our customers, and continued improve-
ments in the way we operate our facilities will result in International Paper entering
a prolonged period of greater profitability and improved performance relative to
our competition.

By all measures, the merger with Union Camp is shaping up to be a tremen-
dous success. The complementary product lines and land holdings have allowed us
to increase our focus in our key areas of paper, packaging and forest products. We
generated over $130 million in annualized merger benefits in 1999 and are ahead
of schedule to meet our goal of at least $425 million in annualized merger benefits
by the end of 2000. A significant portion of our $1.8 billion in profit improvement
by 2002 will be a direct result of the Union Camp merger.

T O O U R S H A R E H O L D E R S

1999 Financial Performance

Earnings for 1999 before special and extraordinary items increased by 60 percent

to $551 million compared with $345 million in 1998. Sales of $24.6 billion were up
from $24.0 billion in 1998. Net earnings after special and extraordinary items were
$183 million, or $.44 per share.

Carter Holt Harvey, the New Zealand-based company in which International

Paper owns a controlling interest, announced the sale of its interest in COPEC, a
large Chilean company. The proceeds from the sale, which closed in early 2000,
exceeded $1.2 billion.

Profitability Improvement

Within International Paper, we talk a lot about “winning.” Our goal, simply
put, is to be the best in our industry and our actions will be focused on generating
higher value for our shareholders, our customers, our employees and our communities.
For example, the compensation of 4,000 International Paper leaders is depen-
dent on profit improvement. Most of our incentive pay is based on how well we do
improving our return on investment in both an absolute sense and against competi-
tion.

Traditionally, we favored capital projects that would yield increased produc-

tion capacity. No more. Today, we are investing discretionary capital in ways to meet
market needs.

And, we are pursuing all of the benefits e-commerce can bring to

International Paper. Whether to generate more revenue or to reduce costs, we are
determined to rapidly integrate electronic commerce into our future strategy.

International Paper is a dynamic organization, and so we are constantly look-

ing to ensure that our businesses are the correct fit for us. We will divest those
businesses that do not add value to the company and acquire others that do.

That is the primary reason for the acquisitions and divestitures we have made

during the last few years. The Union Camp merger, the acquisition of Zellerbach,

T O O U R S H A R E H O L D E R S

Weston Paper and others have added significant value to the company’s bottom line
as part of our effort to build stronger businesses. At the same time, we have sold
$2.5 billion of assets since 1997.

In late 1998, we acquired Svetogorsk AO in Russia, where we immediately
introduced the unique advantages found in International Paper’s people, processes
and technology. The results: rapidly improved financial performance and a product
line that has captured a 40 percent share of the reprographic market in Russia.
Similarly, our Kwidzyn mill in Poland, acquired in 1992, is one of the most prof-
itable mills in the International Paper system with an increasing share of the grow-
ing eastern European market.

There is tremendous value in our being a global company. We have manufac-
turing facilities around the world to serve customers who are part of the emerging,
global marketplace. As more of our customers grow from their home markets to
compete on a worldwide scale, International Paper will be ready to support them,
too.

Looking Ahead

Market fundamentals are extremely promising. Demand for our products is
strong, the supply is well-balanced with demand within our industry, and impor-
tantly, very little new production capacity is expected within the next few years.
The U.S. economy remains healthy, Asia continues to recover and Europe is
rebounding strongly. That’s important to International Paper because the ability to
meet customer needs around the world is a key part of our value strategy.

We have aggressive profit improvement goals in each of our businesses to
ensure we reach our company-wide $1.8 billion profit improvement goal. As part of
that effort, we shut down paper machines in 1999 – some on a temporary basis,
some permanently – and we are not going to add capacity that will result in exces-
sive inventory in the coming years. We are also producing product at a more effi-
cient rate to achieve greater profits, not just more tons. The theory of matching

T O O U R S H A R E H O L D E R S

production rates to highest profit level per ton, known as “marginal economics” is
being used successfully to improve our performance at a number of facilities.

We have also adopted a rigorous financial discipline. We have tight controls on

capital spending, resulting in expenditures well below our depreciation and amorti-
zation levels for 1999 - $1.1 billion in capital expenditures versus $1.5 billion for
D & A. In 2000, we will again keep our capital expenditures below D & A.

We have an aggressive program underway to improve margins. We are
focused on more than cost reduction. We’ve changed how we pay people, how we
allocate capital and how we measure success. We have raised the bar on expectations
and accountability. I am pleased to report the results of these efforts were evident
in 1999 and will grow throughout 2000.

All this leads me to say I am very optimistic about the future. I believe the

outlook for the industry as a whole looks bright and that as a result of all the actions
we have taken and have underway, the future for International Paper is even stronger.

Finally, I want to thank you for the confidence you have placed in this com-

pany and our employees. I know you have a large number of investment choices,
but I want you to know that we are absolutely committed to producing a remark-
able return to our shareowners. To repeat what I said before, we intend to be the
best company in the global paper and forest products industry.

J O H N D I L L O N

C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R

M A R C H 1 ,

2 0 0 0

Table of Contents

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

C O R P O R A T E O V E R V I E W

D E S C R I P T I O N O F I N D U S T R Y S E G M E N T S

I N D U S T R Y S E G M E N T R E S U L T S

P R I N T I N G A N D C O M M U N I C A T I O N S P A P E R S

I N D U S T R I A L A N D C O N S U M E R P A C K A G I N G

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D I S T R I B U T I O N

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C H E M I C A L S A N D P E T R O L E U M

1 1

F O R E S T P R O D U C T S

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C A R T E R H O L T H A R V E Y

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L I Q U I D I T Y & C A P I T A L R E S O U R C E S

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F I N A N C I A L I N F O R M A T I O N B Y I N D U S T R Y S E G M E N T

3 1

F I N A N C I A L I N F O R M A T I O N B Y G E O G R A P H I C A R E A

3 2

R E P O R T O F M A N A G E M E N T O N F I N A N C I A L S T A T E M E N T S

3 2

R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S

3 3

C O N S O L I D A T E D S T A T E M E N T O F E A R N I N G S

3 4

C O N S O L I D A T E D B A L A N C E S H E E T

3 5

C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S

3 6

C O N S O L I D A T E D S T A T E M E N T O F S H A R E H O L D E R S ’ E Q U I T Y

3 7

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

5 9

S I X - Y E A R F I N A N C I A L S U M M A R Y

6 1

I N T E R I M F I N A N C I A L R E S U L T S

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

C O R P O R A T E O V E R V I E W

R E S U L T S O F O P E R A T I O N S

International Paper’s results reflect the merger with
Union Camp Corporation on April 30, 1999. The merger
was accounted for as a pooling-of-interests with all prior
period results having been restated to reflect the combined
results of the merged companies.

International Paper’s 1999 net sales of $24.6 billion

increased 3% as compared with 1998 net sales of $24.0 bil-
lion and were level with 1997 net sales of $24.6 billion. The
increase in sales in 1999 ref lects strengthened sales volumes
offset by lower prices in many of our businesses. Net sales
decreased in 1998 as compared with 1997 due to lower sales
volumes and the weakening New Zealand dollar.

International net sales (including U.S. exports) totaled
$6.9 billion, 28% of total sales in 1999. This is just above
the $6.8 billion of such sales in 1998, but well below the
1997 level of $8.0 billion, both because of the sale of the
Imaging businesses in late 1997 and early 1998 and the
weakening of the New Zealand dollar. Export sales from the
U.S. remained unchanged at $1.5 billion in 1999 from 1998
but were below 1997 exports of $1.8 billion.

Net earnings in 1999 before special and extraordinary
items increased 60% to $551 million, or $1.33 per share,
compared with net earnings before special items of $345
million, or $.84 per share, in 1998 and $381 million, or
$.94 per share, in 1997. Special items amounted to net
expense of $352 million, or $.85 per share, $98 million, or
$.24 per share, and $461 million, or $1.13 per share, in
1999, 1998 and 1997, respectively. Net earnings after spe-
cial and extraordinary items were $183 million, or $.44 per
share, in 1999 and $247 million, or $.60 per share, in
1998, and a net loss in 1997 of $80 million, or $.20 per
share.

Operating profit totaled $1.8 billion in 1999, 29% above
the $1.4 billion in 1998, and 20% above the $1.5 billion in
1997. Higher sales volumes increased 1999 operating profit
by about $210 million, and lower costs increased 1999
operating profit by $370 million as compared with 1998.
However, this increase was offset, in part, by lower average
annual prices which reduced 1999 operating profit by about
$200 million as compared with 1998. Prices for many of
our paper and packaging products reached cyclical lows in
the 1999 first quarter and have since rebounded, increasing
by 8%. In 1999, we curtailed production by more than 1
million tons at our U.S. pulp and paper mills, more than

45% of which was market-related, to help control invento-
ries. Excluding special items, return on investment was
4.0% in 1999, 43% above the 2.8% in 1998 and 33%
above the 3.0% in 1997.

We generated over $130 million in Union Camp merger
benefits in 1999, and we are ahead of schedule to meet our
goal of at least $425 million in annualized merger benefits
by the end of 2000. About 70% of the 1999 special items
were associated with the Union Camp merger, including
direct expenses of the merger and actions taken to achieve
merger benefits.

Market fundamentals are extremely promising. Demand
for our products is strong and supply is well-balanced with
demand within our industry. Also, little new production
capacity is expected within the next few years. The world-
wide economic environment is promising. In addition, we
have aggressive non-price profit improvement goals in each
of our businesses targeted to improve operating profit by
$1.8 billion and return on investment by 4 ROI points by
the end of 2002. We have aligned how we pay people, how
we allocate capital and how we measure success to the
achievement of this goal. As a consequence, we are opti-
mistic about the future.

D E S C R I P T I O N O F I N D U S T R Y S E G M E N T S

P R I N T I N G A N D C O M M U N I C A T I O N S P A P E R S
Uncoated Papers: International Paper is one of the
largest U.S. producers of uncoated papers. With our recent
merger with Union Camp we have production capacity of
3.7 million tons annually. Products include office papers,
printing papers, fine papers, and converting grades for
envelopes, tablets, business forms and specialty papers.
Brands include HammerMill, Springhill, Great White, Beckett,
Strathmore, and Via by HammerMill. We also make uncoated
bristols for file folders, tags, tickets and index cards.

Coated Papers: We produce coated papers and bristols
for catalogs, direct mail, magazines and other media, with
production capacity of 1.3 million tons annually.
International Paper ranks fifth among U.S. coated ground-
wood producers. We also produce coated freesheet, such as
Accolade, for upscale catalogs and magazines, and make
Carolina coated bristols used for book covers and commer-
cial printing applications.

Pulp: We have annual production capacity of 1 million

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

tons of market pulp. Grades range from pulp used to make
paper to fluff pulp for hygiene products.

plastic packaging for both consumer and industrial markets
from 11 U.S. and South American locations.

European Papers: Our European business is a leading
supplier of office, coated and specialty papers produced at
facilities in France, Germany, Poland, the United Kingdom
and Russia. This business has annual production capacity of
over 2 million tons. Brands such as ReyMat, Reylux, Duo,
and Polspeed supply the papers Europe’s consumers and busi-
nesses require. Zanders produces premium coated papers
such as Ikono for high-end brochures and annual reports.
Our facilities in Kwidzyn, Poland and Svetogorsk, Russia
produce business papers, newsprint and coated board for
markets throughout Europe.

I N D U S T R I A L A N D C O N S U M E R P A C K A G I N G

Industrial Packaging: With production capacity of 5

million tons annually, International Paper is the second
largest manufacturer of containerboard in the U.S. Nearly
one-third of our production is specialty grades, such as
PineLiner, Sunliner, Polarboard, Coastliner and BriteTop. About
60% of our production is converted to corrugated boxes and
other packaging by our 57 U.S. container plants. Our
European operations include 1 recycling mill in France and
23 container plants in France, Ireland, Italy, Spain and the
United Kingdom. Our global presence now includes opera-
tions in Puerto Rico, Chile, Turkey, Argentina and China.
Industrial Packaging also offers total packaging solutions
and supply chain initiatives through regional packaging
design centers. We have capacity to produce over 600,000
tons of kraft paper each year that is used in multiwall and
retail bags.

Consumer Packaging: With production capacity of 2

million tons annually, International Paper is the world’s
largest producer of bleached board. Our Everest and Starcote
brands are used in packaging applications for juice, milk,
food, cosmetics, pharmaceuticals, computer software and
tobacco products. Premium label papers are sold under the
DeltaStar family of products. Over one-third of our bleached
board is converted into packaging and other products in our
own plants. Beverage Packaging has 21 plants worldwide
offering complete packaging systems, from paper to
machines, using fresh and aseptic technologies. Retail
Packaging operates 12 plants producing packaging with
high-impact graphics for a variety of consumer products.
Foodservice offers cups, lids, cartons, bags, containers, trays
and plates from 5 domestic plants and through 5 interna-
tional joint ventures. Flexible Packaging provides paper and

Industrial Papers: We produce 370,000 tons of special-

ty industrial papers annually used in applications such as
pressure-sensitive labels, food and industrial packaging,
industrial sealant and tapes and consumer hygiene products.

D I S T R I B U T I O N

Through xpedx, our North American merchant distribu-
tion business, we supply industry wholesalers and end users
with a vast array of printing, packaging, graphic arts, main-
tenance and industrial products. xpedx operates over 100
warehouses, 130 sales offices and 180 retail stores in the
U.S. and Mexico. Overseas, Papeteries de France, Scaldia in
the Netherlands and Impap in Poland serve European mar-
kets. About 22% of Distribution sales are products from
International Paper’s own facilities.

C H E M I C A L S A N D P E T R O L E U M

Chemicals: Arizona Chemical is a leading processor of
crude tall oil and crude sulfate turpentine, natural by-prod-
ucts of the papermaking process. Products also include spe-
cialty resins used in adhesives and inks, made at 15 plants in
the U.S. and Europe. In addition, we produce chemical spe-
cialty pulp, primarily utilized in cigarette filters and fabrics.
Bush Boake Allen: Bush Boake Allen, which is 68.2%
owned by International Paper, conducts operations on 6 con-
tinents and has locations in 39 countries worldwide. Bush
Boake Allen supplies f lavors and fragrances for use in foods,
beverages, cosmetics and toiletries.

Petroleum: This business manages mineral rights on
company-owned and leased land and explores and develops
oil and gas reserves, generally by establishing partnerships
with other independent oil and gas producing companies.
These assets contribute to our results and serve as a partial
hedge against fluctuating energy prices.

F O R E S T P R O D U C T S

Forest Resources: International Paper owns or manages

7.1 million acres of forestlands in the U.S., mostly in the
South. In 1999, these forestlands supplied about 25% of our
wood requirements.

Wood Products: Our 28 U.S. plants produce southern

pine lumber, plywood, oriented strand board (OSB) and
engineered wood products. The majority of these plants are
located in the southern U.S. near our forestlands. We produce
2.3 billion board feet of lumber, 900 million square feet of
plywood and 900 million square feet of OSB annually.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Masonite: From 9 locations in North America, Europe
and Korea, Masonite manufactures and markets CraftMaster
door facings and other molded products for residential and
commercial construction, as well as a broad line of hard-
board exterior siding, industrial hardboard and a wide range
of softboard products for the home and office. Our world-
wide capacity for door facings is approximately 1.2 billion
square feet annually.

Decorative Products: We produce high- and low-pres-
sure laminates, particleboard and graphic arts products from
15 facilities. Markets served include residential and com-
mercial construction, furniture, store fixtures, graphic arts
and specialty niche markets.

C A R T E R H O L T H A R V E Y

Carter Holt Harvey is 50.3% owned by International
Paper. It is one of the largest forest products companies in
the Southern Hemisphere, with operations in New Zealand,
Australia and Chile. The Australasian market accounts for
84% of its sales. Asia, particularly Korea and Japan, is an
important market for its logs. Carter Holt Harvey’s forest
operations include ownership of 785,000 acres of predomi-
nantly sustainable radiata pine plantations in New Zealand
currently yielding 5.8 million cubic meters of logs annually.
This yield is expected to increase to over 7 million cubic
meters by 2005. About 50% of the harvest is processed
through Carter Holt Harvey’s wood products and pulp and
paper businesses. Their access to one of the largest low-cost
softwood fiber bases in the Southern Hemisphere is a key
strength.

Carter Holt Harvey is the largest Trans-Tasman company
producing lumber, plywood and engineered wood products.
It has 600 million board feet of lumber capacity annually.
Carter Holt Harvey is New Zealand’s largest manufacturer
and marketer of pulp and paper products, with overall annu-
al capacity of 850,000 tons at 4 mills. Its major products are
linerboard and pulp. Carter Holt Harvey produces 140,000
tons of tissue products from 2 mills and 7 converting facili-
ties and is the market leader and largest manufacturer in
Australia. Sorbent is the most recognized local tissue brand in
this market. Carter Holt Harvey produces corrugated boxes
and plastic packaging with a focus on the horticulture, pri-
mary produce and foodservice markets in New Zealand and
Australia. It also has a significant share of the Australian cup
market through its Continental Cup joint venture with
International Paper. The distribution business comprises the
Carters building supplies chain and paper merchants B. J.

Ball in New Zealand and Raleigh Paper in Australia.

At December 31, 1999, Carter Holt Harvey owned a 50%

stake in a joint venture (Los Andes) that held 60% of
Compania de Petroleos de Chile (COPEC), Chile’s largest
industrial conglomerate. Carter Holt Harvey announced the
sale of its indirect interest in COPEC for just over $1.2 bil-
lion effective January 3, 2000.

I N D U S T R Y S E G M E N T R E S U L T S

P R I N T I N G A N D C O M M U N I C A T I O N S P A P E R S

Printing and Communications Papers posted sales of $5.9

billion in 1999 and 1998 compared with $6.4 billion in
1997. Increased volumes were more than offset by lower
market prices.

Operating profit rose to $255 million in 1999 from $180

million in 1998 due mainly to the success of management
actions to reduce costs. In 1997, operating profit was $245
million.

Printing and Communications Papers
_____________________________________________
1997
In millions
_____________________________________________
$ 6,415
Sales
$ 245
Operating Profit

1999
$5,930
$ 255

1998
$ 5,915
$ 180

U.S. Papers sales were $4.1 billion in 1999, down from

$4.3 billion in 1998 and $4.6 billion in 1997. Although
business conditions improved during 1999, average prices
were lower than 1998 levels. Demand in the U.S. began to
strengthen in the latter part of 1999 and prices increased.
Due to seasonal weaknesses at the end of the year, however,
production was curtailed at our U.S. mills to avoid building
inventories. U.S. Papers operating profit in 1999 improved
considerably from 1998 levels primarily due to our cost
reduction efforts. Current year operating profit was about
even with 1997.

Uncoated Papers sales were $2.6 billion in 1999, a decline
of 3% from 1998 and 12% from 1997. On average, prices in
1999 were 3% lower than 1998 and 4% lower than 1997.
Uncoated prices fell throughout 1998, bottomed out in the
first quarter of 1999, but steadily increased thereafter. Year-
end 1999 pricing reflected a 17% increase over the first
quarter of 1999. Despite lower sales, operating profit
improved considerably in 1999 over 1998 reflecting the
effect of cost reduction initiatives. Current year operating

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

profit remained below 1997 levels.

I N D U S T R I A L A N D C O N S U M E R P A C K A G I N G

Coated Papers sales of $1.1 billion decreased 5% and 3%

Industrial and Consumer Packaging sales totaled $7.0

from 1998 and 1997, respectively. On average, prices
decreased 2% from 1998, but were above 1997 levels.
Operating profit decreased 12% from 1998, primarily due
to operational impacts from Hurricane Floyd, as well as
other manufacturing problems during the year. Operating
profit in 1999 was considerably higher than 1997.

Pulp sales from our U.S. facilities were $425 million in
1999, increasing 7% over 1998 but below 1997 by 14%.
The improvement from 1998 ref lects an increase in average
pulp prices of 6% with volume relatively flat. Pulp prices
ended the year 33% higher than the first quarter of 1999.
Although the business continued to post an overall loss, sig-
nificant improvement occurred from 1998 reflecting the
effect of higher pulp prices. However, operating profit
remained below 1997 results.

Future profits of U.S. Papers should improve as we contin-
ue to realize additional benefits from our profit improvement
programs and expected price improvements during 2000.
European Papers sales were $1.8 billion, 9% higher
than 1998 and 2% lower than 1997. European demand for
paper began to recover in the spring and continued through
the year. Except for market pulp, prices declined for all
product lines in the first half of the year, remained stable
during the summer, and began to increase in the fourth
quarter. Pulp prices increased over 40% during the year,
more than $140 per ton on average. The continued
strengthening of the U.S. dollar against local currencies in
1999 depressed the translated value of our sales and
increased pulp costs. Despite these factors, operating profit
remained level with 1998 as cost-reduction and productivity
efforts continued. Zanders reported profit for the third con-
secutive year, even though pulp costs rose faster than prod-
uct prices. We continued our expansion into the highly prof-
itable markets of Central and Eastern Europe, which, cou-
pled with low-cost production, resulted in another strong
performance from Kwidzyn and a successful first full year
for Svetogorsk.

Demand in Europe is expected to grow in 2000. For
uncoated papers, we expect a 4% increase in demand and
for prices to continue to rise. Coupled with a strategic focus
on value-added grades, the outlook is good.

billion in 1999 and 1998. Operating profit in 1999
increased 67% to $560 million from $335 million mainly
due to manufacturing and marketing initiatives resulting in
increased volumes and cost reductions. Operating profit was
also bolstered by synergies realized from the Union Camp
merger. Improved Industrial Packaging pricing during the
second half of the year was offset by competitive markets
served by Consumer Packaging. Sales were $6.8 billion in
1997 and operating profit was $260 million.

Industrial and Consumer Packaging
_____________________________________________
1997
In millions
_____________________________________________
$ 6,785
Sales
$ 260
Operating Profit

1999
$7,050
$ 560

1998
$ 7,010
$ 335

Industrial Packaging revenues were $3.8 billion in
1999, up from $3.7 billion in 1998 and $3.5 billion in 1997.
After incurring an operating loss in 1997, profits have risen
steadily in 1998 and 1999. Demand remained healthy
throughout 1999, with our containerboard and domestic box
businesses recording a 7% rise in shipments compared to
1998. The growth in shipments from the converting plants
exceeded the industry growth average, reflecting the continu-
ing emphasis on customer-focused improvement programs,
merger synergies and a full year of operation for the Weston
plants acquired in April 1998. Average U.S. prices for liner-
board rose 4% in 1999, but exited the year almost 30% high-
er than January. European box markets were weaker than
expected for most of 1999, which held results of our
European container plants to 1998 levels. Kraft papers
domestic markets improved during the fourth quarter, with
better margins due to stronger demand for high-end prod-
ucts.

Looking ahead, the Industrial Packaging business is mea-
surably stronger than it was entering 1999, both from sales
and manufacturing perspectives. Given the relatively
healthy industry conditions, we expect a strong performance
in 2000.

Consumer Packaging sales were $3.2 billion, down

slightly from $3.3 billion in both 1998 and 1997. Operating
profit was relatively flat with 1998 but below 1997 by 9%.
Sales in 1999 were lower than 1998 and 1997 due to com-
petitive market conditions in most businesses at the begin-
ning of 1999 and lower bleached board volume due to the

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

sale of the Sprague mill in April 1999. Performance improve-
ment programs across all of the businesses were able to offset
most of the shortfall caused by market conditions.

Bleached board markets stabilized during the second
quarter. Backlogs ended the year at a respectable mid-20
day range. Asian economic recovery was a positive factor for
several businesses. Bleached board exports increased 6%
year over year. Operational costs were reduced 7% in the
current year due to mill manufacturing initiatives. The
bleached board business embarked on an aggressive process
improvement program that began to add to results the last
half of the year. We expect the contribution from this pro-
gram next year will be significant. Our converting business-
es, leveraging the customer-focused operational realignment
that occurred at the end of 1998, made progress toward pro-
viding total packaging solutions to our customers.

Our outlook going into 2000 is optimistic. Market condi-

tions improved compared to this time last year.

D I S T R I B U T I O N

North American and European distribution sales totaled

$6.9 billion in 1999 compared with $6.3 billion in 1998
and $5.3 billion in 1997. Operating profit in 1999 increased
24% from 1998 and 17% from 1997. Profit on sales
increased from 1.4% in 1998 to 1.5% in 1999 due largely
to sharply higher earnings resulting from the Zellerbach
integration. This impact from Zellerbach more than offset a
competitive paper price environment, one-time integration
costs, and systems spending related to Year 2000 readiness.

Distribution
_____________________________________________
1997
In millions
_____________________________________________
$ 5,250
Sales
90
$
Operating Profit

1998
$ 6,280
85
$

1999
$6,850
$ 105

xpedx, our North American distribution operation, post-
ed sales of $6.5 billion in 1999, up 9% from 1998 and 32%
from 1997. The increase over 1998 was driven by unit sales
growth of 4% and the acquisition of Zellerbach in July
1998. Excluding Zellerbach and Taussig’s Graphic Supply,
Inc., acquired in late 1997, sales were $5.2 billion in 1998.
Despite sales growth, operating profit declined 0.5% mainly
because of lower sales prices and increasingly competitive
markets for printing papers as both merchants and cus-
tomers consolidate. Certain one-time costs also reduced
1998 operating profit. These included marketing costs
aimed at strengthening the xpedx brand name, as well as

costs related to the Zellerbach integration.

In 1999, xpedx and Alling & Cory, the distribution com-

pany acquired through our merger with Union Camp, suc-
cessfully combined operations in 7 metropolitan areas elimi-
nating duplicate facilities. By the end of 1999, the integra-
tion was largely completed, with a reduction of over 400
employees. Operating profits in the combined facilities
trended up in the second half of 1999. Our strategy in both
the integration of Zellerbach and Alling & Cory was to
retain only those customers and markets that met our
strategic and financial objectives.

xpedx plans to achieve higher earnings in 2000, as per-
formance from the facilities impacted by the Zellerbach and
Alling & Cory mergers improve further, and non-recurring
integration expenses and Year 2000-related expenses are
eliminated.

Our European distribution operations—Papeteries de
France, Scaldia in the Netherlands and Impap in Poland—
posted sales of $350 million, increasing 3% from 1998 and
8% from 1997. Operating profit increased 26% over 1998
and 34% over 1997.

Overall, we expect an acceleration of the improvement in

earnings for the distribution businesses in 2000.

C H E M I C A L S A N D P E T R O L E U M

Chemicals and Petroleum sales were $1.5 billion in 1999,
flat with 1998 and 8% lower than 1997. Earnings were $125
million in 1999, declining from $135 million in 1998 and
$180 million in 1997. Results were mixed with the
Petroleum operation showing an increase over last year which
was more than offset by declines in the other businesses.

Chemicals and Petroleum
_____________________________________________
1997
In millions
_____________________________________________
$ 1,585
Sales
$ 180
Operating Profit

1999
$1,455
$ 125

1998
$ 1,465
$ 135

Chemicals sales were $885 million in 1999, slightly below

1998, and 11% lower than 1997. Operating profit declined
about 20% from 1998 and 37% from 1997. The decline over
the three year period is due largely to decreased demand and
lower prices for chemical cellulose pulp. We have recently
implemented plans in this business which will reduce costs
and improve financial performance. While demand for com-
modity chemical products and specialty adhesive resins was
strong throughout the year, shipments of other upgraded
products, particularly ink resins, were lower. In addition, prices

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

were down due to lower raw material prices for crude tall oil
and crude sulfate turpentine, as well as increased competition
from substitute products. We continued to lower our manufac-
turing costs. Our focus for 2000 is to capture the merger syn-
ergies, further improving our cost position and eliminating
redundant capacity.

Bush Boake Allen sales of $500 million were better
than both 1998 and 1997 by 3% and 2%, respectively.
Operating profit, however, was 24% below last year and
17% below 1997. The operation’s Flavors and Fragrance
business grew by about 6% as compared with 1998 with
strong demand from the Americas and Asia, partially offset
by weaker European shipments. The decline in crude sulfate
turpentine prices, however, coupled with industry overca-
pacity, resulted in strong downward price pressure. As a
result, sales from the Aroma Chemicals business declined by
about 7%. The resulting decline in operating profit more
than offset the 5% earnings increase generated by the
Flavors and Fragrance business.

Petroleum realized sales of $70 million in 1999 which

were about equal to 1998 and 31% lower than 1997.
Operating profit was 57% higher than 1998, but 32% lower
than 1997. Total year average prices for gas and oil increased
over last year’s very low levels. However, we were still about
10% below 1997. Our exploration program, generally operat-
ed through joint ventures, is focused on West Texas, the Gulf
Coast and the Gulf of Mexico and yielded reserves which were
about equal to production in 1999.

F O R E S T P R O D U C T S

Forest Products sales were $3.2 billion in 1999, up from

$2.9 billion in 1998 and $3.0 billion in 1997. Operating
profit totaled $725 million in 1999 compared with $620
million in 1998 and $615 million in 1997. The 1999
improvement was driven by the strong performance of our
Building Materials businesses.

Forest Products
_____________________________________________
1997
In millions
_____________________________________________
$ 3,025
Sales
$ 615
Operating Profit

1999
$3,205
$ 725

1998
$ 2,930
$ 620

Forest Resources sales in 1999 were $653 million com-
pared with $553 million in 1998 and $537 million in 1997.
Operating profit was 7% below 1998 but 16% higher than
1997. Earnings in all three years include income from trans-
actions that disposed of interests in non-strategic forest-

lands. While harvest volumes in 1999 remained about the
same as in 1998, average prices declined from the record
levels of 1998. Pine sawtimber prices averaged about 6%
lower, and pulpwood prices about 22% lower, in 1999.

Stumpage prices entering 2000 were well below compara-

ble prices at the beginning of 1999. Furthermore, wood
inventory levels at pulp and paper mills and wood products
plants are generally at or near targeted levels, except in the
Carolina’s where facilities are still recovering from the hurri-
canes of 1999. Accordingly, we do not expect any significant
changes in prices in early 2000, although we believe that full
year prices should average about the same as in 1999. Harvest
volumes in 2000 are also scheduled to approximate 1999 lev-
els.

Wood Products sales increased 17% to $1.4 billion in
1999 from $1.2 billion in 1998. Sales in 1997 were $1.3
billion. Operating profit for this business improved signifi-
cantly from the prior year. A strong U.S. housing market,
low interest rates, and generally good U.S. and global eco-
nomic conditions contributed to the strong demand and
higher pricing for wood products. OSB reached record price
levels while lumber prices also strengthened. Also impact-
ing earnings favorably were merger synergies, product mix,
management programs and lower fiber costs.

Masonite sales were $512 million in 1999, 3% above
1998 sales of $499 million, but 10% below 1997 sales of
$567 million. The 1999 improvement was mainly due to
increased door facings volume in North America. However,
increased global capacity for molded door facings caused a
decline in door facing prices, partially offsetting the sales
growth. In addition, the siding and hardboard markets are
becoming increasingly competitive. Weaker demand for
these products resulted in lower operating profit. Internal
cost reduction initiatives and new product development will
begin to offset these declines in 2000.

Decorative Products sales were $624 million in 1999
which were 5% below 1998 sales of $658 million. Sales in
1997 were $599 million. The decrease in sales was mainly
due to the closure of 2 medium density fiberboard (MDF)
plants in late 1998 and sale of the Fountainhead business in
early 1999. Sales volumes and profitability improved in the
particleboard and low pressure laminates businesses. The
markets for high pressure laminates in North America and
Europe were extremely competitive, leading to lower earn-
ings in this business.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

export market, after nearly collapsing in 1998, returned to
strength in 1999. Log export volumes in the fourth quarter
of 1999 of 545,000 tons were 29% higher compared to the
same quarter a year ago and set a quarterly record. However,
because of a large negative U.S. GAAP adjustment for
COTH, the Forests segment remained in a loss position
although improving 70% and approaching breakeven. The
Wood segment results remained relatively robust, but were
about f lat with 1998. However, momentum is now
strengthening and lumber price increases in both Australia
and New Zealand of between 5% and 7% have been
announced. Construction of a plant to produce laminated
veneer lumber, a value-added product, is underway in New
Zealand. Earnings for the Pulp, Paper and Tissue segment
improved in 1999. Prices are improving and after two peri-
ods of construction down time in 1999 to complete its
modernization, the Kinleith mill produced 142,000 tons in
the fourth quarter. However, the performance of the
Kinleith linerboard machine is not yet at operating design
levels. The tissue business remains strong, holding its share
of the Australian premium toilet tissue category in the face
of heavy competition and price discounting while the paper
towel business achieved its highest market share ever in a
category with 10% annual growth. The ongoing focus in
coming months is to minimize the impact of rising pulp
prices, which are significantly higher than a year ago. The
Packaging segment earnings fell 74% from 1998 levels, pri-
marily because of intensely competitive markets.
Distribution returned to profitability in 1999. Earnings
from Carter Holt Harvey’s equity investment in COPEC
showed significant improvement in 1999 as higher pulp
demand and prices more than offset a 12% weakening in
the Chilean peso. Carter Holt Harvey sold its investment in
COPEC for just over $1.2 billion in January 2000.

The outlook is for continuing volume and price improve-

ment as well as further gains to be realized from Carter
Holt Harvey’s performance improvement program.We
expect good demand from the New Zealand agricultural
sector and construction markets in both Australia and New
Zealand. Driving performance improvement will continue to
be a priority for management.

C A R T E R H O L T H A R V E Y

International Paper’s results for this segment differ from
those reported by Carter Holt Harvey in New Zealand in
four major respects:
1. Carter Holt Harvey’s reporting period is a fiscal year end-
ing March 31. Our segment results are for the calendar
year.

2. Our segment earnings include only our share of Carter

Holt Harvey’s operating earnings. Segment sales, howev-
er, represent 100% of Carter Holt Harvey’s sales.

3. Carter Holt Harvey reports in New Zealand dollars but
our segment results are reported in U.S. dollars. The
weighted average currency exchange rate used to translate
New Zealand dollars to U.S. dollars was .52 in 1999, .54
in 1998, and .66 in 1997.

4. Carter Holt Harvey reports under New Zealand account-
ing standards but our segment results comply with U.S.
generally accepted accounting principles (U.S. GAAP).
The major differences relate to cost of timber harvested
(COTH), land sales, COPEC and start-up costs. These
differences reduced segment earnings by about $50 mil-
lion in 1999, $40 million in 1998 and $30 million in
1997.

Carter Holt Harvey
_____________________________________________
1997
In millions
_____________________________________________
$ 1,955
Sales
90
$
Operating Profit

1998
$ 1,505
20
$

1999
$1,605
40
$

Carter Holt Harvey’s segment sales were $1.6 billion in
1999, slightly higher than 1998 sales of $1.5 billion but
below 1997 sales of $2.0 billion. The translation effect of
the weakening New Zealand dollar more than accounted for
the sales shortfall as compared with 1997.

Segment operating income doubled to $40 million in
1999, compared with the $20 million earned in 1998, but
was still less than half the operating profit realized in 1997.
Results in 1998 were severely impacted by the weakness in
Asian economies during this period, as well as that of New
Zealand. However, volumes and prices in most products
have improved in 1999 as the Asian markets have recovered
and paper has moved up from a cyclical low point in the
first quarter. Also contributing to an improvement in earn-
ings in 1999 was the continued success of Carter Holt
Harvey’s performance improvement program.

Forests sales in 1999 improved 22% from 1998 as the log

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

L I Q U I D I T Y & C A P I T A L R E S O U R C E S

C A S H P R O V I D E D B Y O P E R A T I O N S

Cash provided by operations totaled $1.7 billion for 1999,

compared with $2.1 billion in 1998 and $1.6 billion in
1997. The largest factors in the decrease in operating cash
flow in 1999 were payments related to the Union Camp
merger and restructuring and legal reserves. Excluding spe-
cial items, after taxes and minority interest, net earnings for
1999 increased $206 million compared with 1998.
However, 1998 net earnings were $36 million less than
1997. An increase in working capital reduced 1999 operat-
ing cash flow by $32 million. Working capital changes
increased 1998 operating cash flow by $74 million and
decreased 1997 operating cash flow by $451 million.
Depreciation and amortization expense was $1.5 billion in
1999 and 1998 and $1.6 billion in 1997.

I N V E S T M E N T A C T I V I T I E S

Capital spending was $1.1 billion in 1999, lower than
1998 spending of $1.3 billion and 1997 spending of $1.4
billion. As part of our program to improve return on invest-
ment, we plan to continue to hold annual capital spending
below our annual depreciation and amortization expense of
$1.5 billion. We expect 2000 spending to be between $1.2
billion and $1.3 billion. The following table presents capital
spending by each of our business segments.

Capital Spending by Industry Segment

1999
In millions for the years ended December 31
______________________________ ______
Printing and Communications Papers
$ 382
Industrial and Consumer Packaging
287
Distribution
16
Chemicals and Petroleum
104
Forest Products
189
Carter Holt Harvey
99
______
Subtotal
1,077
Corporate and other
62
______
Total
$1,139
______
______

1998
______
$ 302
391
19
170
222
166
______
1,270
52
______
$1,322
______
______

1997
_______
385
$
343
20
142
249
230
______
1,369
79
______
$ 1,448
______
______

Under a 1997 business improvement plan, we undertook

the sale of $1 billion of non-strategic assets. This program
was substantially completed in 1998. Divestitures complet-
ed during 1998 included the Imaging printing and graphic
arts businesses, the label business, the Veratec nonwovens
division and Carter Holt Harvey’s building products busi-
ness. Substantially all of these proceeds were used to reduce
debt or for general corporate purposes.

On November 24, 1998, International Paper announced

that it had reached an agreement to merge with Union
Camp Corporation (Union Camp), a diversified paper and
forest products company. The transaction was approved by
Union Camp and International Paper shareholders on April
30, 1999. Union Camp shareholders received 1.4852
International Paper common shares for each Union Camp
share held. The total value of the transaction, including the
assumption of debt, was approximately $7.9 billion.

International Paper issued 110 million shares for 74 mil-
lion Union Camp shares, including options. The merger was
accounted for as a pooling-of-interests.

In April 1999, Carter Holt Harvey acquired the corrugat-

ed packaging business of Stone Australia, a subsidiary of
Smurfit-Stone Container Corporation. The business consists
of two sites in Melbourne and Sydney which serve industrial
and primary produce customers.

In December 1998, we completed the acquisition of
Svetogorsk AO, a Russia-based pulp and paper business,
which has enhanced International Paper’s ability to serve
growing market demand in Eastern Europe. Also in
December 1998, Carter Holt Harvey and International
Paper jointly acquired Marinetti S.A.’s paper cup division
based in Chile. This acquisition has enabled the foodservice
business to better serve markets in South America.

In July 1998, International Paper acquired the Zellerbach

distribution business from the Mead Corporation for $261
million in cash. Zellerbach has been integrated into xpedx,
our distribution business.

In April 1998, Weston Paper and Manufacturing Company
(Weston) was acquired by exchanging 4.7 million International
Paper common shares valued at $232 million for all of the
outstanding Weston shares in a noncash transaction.

In April 1998, Carter Holt Harvey acquired Riverwood
International, an Australia-based folding carton business.

In March 1998, a wholly-owned subsidiary of

International Paper purchased all of the publicly traded
Class A depository units of IP Timberlands, Ltd. for a cash
purchase price of $100 million.

In February 1998, we entered into a joint venture with
Olmuksa in Turkey for the manufacture of containerboard
and corrugated boxes for markets in Turkey and surround-
ing countries. Also in February 1998, Carter Holt Harvey
and International Paper jointly acquired Australia-based
Continental Cup.

Acquisitions in 1997 included: Taussig’s Graphic Supply,
Inc., a distribution company; Phoenix Display and Packaging

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Corporation, a merchandising and point-of-purchase display
company; Merbok Formtec, a pioneer in the development of
door facing products; Antietem Paper Company, a distribu-
tion company; and a 75% interest in Puntapel S.A., an
Argentinean multiwall plant. The cost of these acquisitions,
net of cash acquired, was $94 million in the aggregate.

F I N A N C I N G A C T I V I T I E S

During 1999, we extinguished $275 million of high interest
debt that was assumed in the merger with Union Camp, at an
after tax cost of $16 million, which is reflected as an extraor-
dinary item in the 1999 statement of earnings. We also
reduced other debt, primarily short-term, by $540 million.
During 1998, we reduced debt, primarily short-term, by
$1.9 billion and issued $1.5 billion of preferred securities of
subsidiaries. In March 1998, Timberlands Capital Corp. II, a
wholly-owned consolidated subsidiary, issued $170 million of
7.005% preferred securities as part of the financing to repur-
chase the outstanding units of IP Timberlands, Ltd. In June
1998, IP Finance (Barbados) Limited, a wholly-owned consol-
idated non-U.S. subsidiary, issued $550 million of preferred
securities with a dividend payment that is based on LIBOR.
In September 1998, International Paper Capital Trust III, a
wholly-owned consolidated subsidiary, issued $805 million of
7 7/8% mandatorily redeemable preferred securities.

During 1997, we issued environmental and industrial
development bonds for various capital projects, repaid $164
million of 10% debentures, and reduced commercial paper
and short-term borrowings.

Long-term debt and notes payable on our consolidated
balance sheet were $8.4 billion in 1999 compared with $9.1
billion in 1998 and $11.0 billion in 1997. However, after
adjusting for foreign exchange, acquisitions and restructur-
ing activities, total debt was reduced by approximately $540
million and $1.9 billion in 1999 and 1998, respectively, on
a cash flow basis. During 1998, one of the corporate debt
rating agencies, Standard & Poor, downgraded our long-
term debt rating from A- to BBB+.

Unless otherwise noted, the proceeds of all of the financ-
ings described above were used to reduce short-term debt or
for general corporate purposes.

Dividend payments were $418 million, $431 million and

$427 million in 1999, 1998 and 1997, respectively. On a
per share basis, dividend payments were $1.01 in 1999, and
$1.05 in 1998 and 1997. The International Paper dividend
has remained at $1.00 per share during the three year peri-
od. However, dividend payments on a per share basis have

been restated to include dividends paid by Union Camp.

C A P I T A L R E S O U R C E S O U T L O O K F O R 2 0 0 0

Our financial condition continues to be strong. We expect to

receive just over $1.2 billion after tax in the first quarter of
2000 from the sales of our equity investments in COPEC and
Scitex. The cash proceeds from the sale of COPEC are being
received by our consolidated subsidiary, Carter Holt Harvey.
We anticipate that cash flow from operations, supplemented as
necessary by short- or long-term borrowings, will be adequate
to fund our capital expenditures, to service existing debt, and
to meet working capital and dividend requirements during
2000.

O T H E R F I N A N C I A L S T A T E M E N T I T E M S

Net interest expense decreased to $541 million in 1999
compared with $614 million in 1998 and $607 million in
1997. The decrease was primarily due to a net decrease in
total debt outstanding, after adjusting for the effects of cur-
rency translation, from December 1998 to December 1999.
Proceeds received from the sale of assets in 1998 and 1999 as
well as proceeds from the issuance of preferred securities were
used to reduce debt and for other general corporate purposes.
Minority interest expense increased to $163 million in
1999 compared with $87 million in 1998 and $140 million
in 1997. Minority interest expense increased in 1999 because
the preferred securities of subsidiaries issued during 1998
were outstanding for the full year in 1999 and Carter Holt
Harvey’s earnings improved. The decrease in minority interest
expense from the year ended December 31, 1997 to the year
ended December 31, 1998, was primarily due to a decrease in
earnings at Carter Holt Harvey in 1998 as compared to 1997
partially offset by an increase in interest expense related to
the issuance of preferred securities in 1998.

Net periodic pension results for the U.S. defined benefit

plans were income of $49 million, $77 million and $63
million in 1999, 1998 and 1997, respectively. The variation
between pension income in 1999 and 1998 was primarily
due to the expiration of International Paper’s transition asset
amortization which reduced 1999 pension income by $26
million as compared to 1998.

As of June 1, 1999 International Paper enhanced pension
benefits for its major union groups. As a result, the pension
plan was revalued. The revaluation assumed a discount rate
of 7.25% and a rate of compensation increase of 4.5%.
These actions had the net effect of reducing the pension
benefit obligation by $179 million.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Our equity investments consisted primarily of Scitex and
Carter Holt Harvey’s 30% ownership in COPEC, which it
held through a joint venture. Both Scitex and COPEC are
publicly traded companies. Carter Holt Harvey sold its equi-
ty interest in COPEC on January 3, 2000 for just over $1.2
billion and International Paper sold its equity interest in
Scitex on January 6, 2000 for $79 million. At such time the
carrying value of these investments was $865 million and
$35 million, respectively. These transactions will result in
income after tax and minority interest of about $135 million
or $.33 per share, which will be recorded in the first quarter
of 2000 as an extraordinary item pursuant to pooling-of-
interests accounting rules.

S P E C I A L I T E M S I N C L U D I N G R E S T R U C T U R I N G
A N D B U S I N E S S I M P R O V E M E N T A C T I O N S

Special items reduced 1999 net earnings by $352 million,
1998 net earnings by $98 million and 1997 net earnings by
$461 million. The following tables and discussion present
the impact of special items for 1999, 1998 and 1997:

In millions
____________________________
Before special and extraordinary items
Union Camp merger-related termination benefits
One-time merger expenses
Restructuring and other charges
Environmental remediation charge
Provision for legal reserves
Reversal of reserves no longer required

After special items

Earnings
(Loss)
Before Income
Taxes and
Minority
Interest

1999
________________
Earnings
(Loss)
After Income
Taxes and
Minority
Interest
_______ _______
$ 551
(97)
(78)
(180)
(6)
(18)
27
______
______
$ 199
______

$1,005
(148)
(107)
(298)
(10)
(30)
36
______
______
$ 448
______

$36 million pre-tax credit ($27 million after taxes) for the
reversal of reserves that were no longer required.

The one-time merger expenses of $107 million consisted

of $49 million of merger costs and $58 million of post-
merger expenses. The merger costs were primarily invest-
ment banker, consulting, legal and accounting fees. Post-
merger integration expenses include costs related to employee
retention, such as stay bonuses, and other one-time cash costs
related to the integration of Union Camp.

The Union Camp merger-related termination benefits
charge relates to employees terminating after the effective
date of the merger under an integration benefits program.
Under this program, 1,218 employees of the combined com-
pany were identified for termination. An additional 777
employees left the company after the merger was announced,
but were not eligible for benefits under the integration bene-
fits program. Benefits payable under this program for certain
senior executives and managers are or have been paid from
the general assets of International Paper. Benefits for remain-
ing employees have been or will be primarily paid from plan
assets of our qualified pension plan. Through December 31,
1999, 787 employees had been terminated. Related cash pay-
ments approximated $65 million (including payments relat-
ed to our nonqualified pension plans). The remaining charge
primarily represents an increase in the projected benefit
obligation of our qualified pension plan.

The following table is a roll forward of the Union Camp

merger-related termination benefit charge:

In millions
_______________________________
Special charge (1,218 employees)

Termination
Benefits
_________
148
$

During 1999 special items amounting to a net charge
before taxes and minority interest expense of $557 million
($352 million after taxes and minority interest expense)
were recorded. The special items included a $148 million
pre-tax charge ($97 million after taxes) for Union Camp
merger-related termination benefits, a $107 million pre-tax
charge ($78 million after taxes) for one-time merger expens-
es, a $298 million pre-tax charge ($180 million after taxes
and minority interest expense) for asset shutdowns of excess
internal capacity and cost reduction actions, a $10 million
pre-tax charge ($6 million after taxes) to increase existing
environmental remediation reserves related to certain former
Union Camp facilities, a $30 million pre-tax charge ($18
million after taxes) to increase existing legal reserves and a

Balance, December 31, 1999

Incurred costs (787 employees)

(116)
_________
32
$
_________
_________
Note: Benefit costs are treated as incurred on the termination date of the employee.

The $298 million charge for the asset shutdowns of excess

internal capacity consisted of a $113 million charge in the
1999 second quarter and a $185 million charge in the 1999
fourth quarter.

The second quarter 1999 $113 million charge for the
asset shutdowns of excess internal capacity and cost reduc-
tion actions included $57 million of asset write-downs and
$56 million of severance and other charges. The following
table and discussion presents additional detail related to the
$113 million charge:

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

In millions
____________________________

Printing and Communications

Papers

European Papers

Consumer Packaging

Industrial Packaging

Chemicals and Petroleum

Industrial Papers

Asset
Write-downs
Total
_________ ________ _____

Severance
and Other

(a)

(b)

(c)

(d)

(e)

(f)

$ 27

$ 33

7
_____

$ 57
_____
_____

7
_____

$ 56
_____
_____

14
_____

$ 113
_____
_____

(a) We recorded a charge of $24 million for severance relat-

ed to the second phase of the Printing and
Communications Papers business plan to improve the
cost position of its mills. The charge, pursuant to our
ongoing severance program, covers a reduction of
approximately 289 employees at several mills in the U.S.
At December 31, 1999, 146 employees had been termi-
nated.

Also, management approved a decision to permanently
shut down the Hudson River mill No. 4 paper machine
located in Corinth, New York and the No. 2 paper
machine at the Franklin, Virginia mill. The Franklin
machine was shut down in September of 1999 and the
Hudson River machine has also been shut down. The
Hudson River machine had previously been temporarily
shut down because of lack of orders. The machines were
written down by $6 million to their estimated fair value
of zero. Severance costs of $3 million cover the termina-
tion of 147 employees. At December 31, 1999, 76
employees had been terminated.

(b) The charge for European Papers, which covers the shut-
down of two mills, consists of $3 million in asset write-
downs, $6 million in severance costs and $1 million of
other exit costs. The Lana mill in Docelles, France was shut
down due to excess capacity. The Lana mill produced
approximately 5,000 metric tons of high-end uncoated spe-
cialty paper per year. This production was shifted to the La
Robertsau mill in Strasbourg, France. The Lana mill fixed
assets were written down $3 million to their estimated fair
value of zero. Costs related to the site closure are expected
to be $1 million and severance related to the termination of
42 employees will be approximately $4 million. The Lana
mill had revenues of $12 million and an operating loss of
$2 million for the year ended December 31, 1999. At
December 31, 1999, 14 employees had been terminated.

The Corimex coating plant in Clermont-Ferrand, France
was shut down in April 1999. The market for thermal fax
paper, which was produced at the plant, has been shrink-
ing since the mid-1990’s. The assets at this plant were
considered to be impaired in 1997 and were written down
accordingly at that time. A $2 million severance charge
was recorded during the second quarter of 1999 to cover
the costs of terminating 81 employees. Corimex had rev-
enues of $6 million and an operating loss of $3 million for
the year ended December 31, 1999. At December 31,
1999, all 81 employees had been terminated.

(c) The Consumer Packaging business has implemented a
plan to improve the overall performance of the Moss
Point, Mississippi mill. Included in this plan is the shut-
down of the No. 3 paper machine which produces labels.
This production is being transferred to the Hudson River
mill. The machine has been written down $6 million to
its estimated fair value of zero. Severance costs including,
but not limited to, employees associated with the No. 3
machine total $10 million and cover the elimination of
360 positions. At December 31, 1999, 272 employees had
been terminated.

Consumer Packaging also shut down the beverage
packaging facility in Itu, Brazil in an effort to reduce
excess capacity in Latin America. The assets were written
down $13 million to their estimated fair value of zero
and a severance charge of $1 million covers the elimina-
tion of 29 positions. Other exit costs total $1 million. At
December 31, 1999, 24 employees had been terminated.

(d) As a result of the merger with Union Camp, we negotiat-
ed the resolution of contractual commitments in an indus-
trial packaging investment in Turkey. As a result of these
negotiations and evaluation of this entity, it was deter-
mined that the investment was impaired. A $12 million
charge was recorded to reflect this impairment and the
related costs of resolving the contractual commitments.

(e) As a result of an overall reduction in market demand for
dissolving pulp, the decision was made to downsize the
Natchez, Mississippi mill. Charges associated with
capacity reduction total $10 million and include the
shutdown of several pieces of equipment. A severance
charge of $3 million includes the elimination of 89 posi-
tions. At December 31, 1999, 88 employees had been
terminated.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

(f) The Industrial Papers business has implemented a plan
to reduce excess capacity at several of its locations. The
Toronto, Canada plant has been closed. Equipment at
the Kaukauna, Wisconsin and Knoxville, Tennessee
facilities has been taken out of service, with additional
equipment at the Menasha, Wisconsin plant scheduled
to be shut down in 2000. The total amount related to
the write-down of these assets is $7 million. Severance
costs related to these shutdowns are $5 million and are
based on a personnel reduction of 81 employees. Other
exit costs total $2 million. At December 31, 1999, a
reduction of 59 employees had been made through sever-
ance and attrition.

The $185 million fourth-quarter 1999 charge for shut-
downs of excess internal capacity and cost reduction actions
includes $92 million of asset write-downs and $93 million
of severance and other charges. The following table presents
additional detail related to the $185 million charge:

In millions
______________________________

Printing and Communications

Papers

Consumer Packaging

Industrial Packaging

Chemicals and Petroleum

Building Materials

Distribution

Carter Holt Harvey

Asset
Write-downs
Total
_________ ________ _____

Severance
and Other

(a)

(b)

(c)

(d)

(e)

(f)

(g)

$ 12

18
_____

$ 92
_____
_____

9
_____

$ 93
_____
_____

27
_____

$ 185
_____
_____

(a) The Printing and Communications Papers charge of $12
million encompasses a production curtailment at the
Erie, Pennsylvania mill due to lower demand, the write-
off of deferred software costs as the result of a decision to
discontinue the installation of a Union Camp order entry
system and an impairment of our investment in the Otis
Hydroelectric plant. In November 1999 we announced
that the Erie, Pennsylvania mill would change from a
seven day, four crew schedule to a three crew schedule in
order to balance operating capacity with sales demand.
This production curtailment resulted in a severance
charge of $2 million for the termination of 99 employees.
The charge for the deferred software write-off was $3 mil-
lion. International Paper also wrote down its investment
in the Otis Hydroelectric partnership by $7 million to the

approximate market value of the investment based upon
our current offer to acquire the other partner’s interest.

(b) The Consumer Packaging business charge of $36 million
is related to the shutdown of facilities, capacity opti-
mization and a deferred software write-off. The
Philadelphia, Pennsylvania plant and the Edmonton,
Alberta plant are scheduled to be shut down. Charges
associated with these shutdowns include $7 million of
asset write-downs, $1 million of severance costs covering
the termination of 194 employees and other exit costs of
$5 million. Charges related to eliminating excess capacity
include $7 million of asset write-downs and a severance
charge of $11 million for the termination of 512 employ-
ees. The capacity reductions are related to the aseptic and
flexible packaging businesses. The business also decided
to discontinue the implementation of a Union Camp
order management system. The write-off of deferred soft-
ware costs related to this system is $5 million.

(c) The Industrial Packaging business will shut down the fol-
lowing plants and shift production to other facilities: the
Terre Haute, Indiana box plant; the Northlake, Illinois
box plant; the Columbia, Tennessee sheet plant; and the
Montgomery, Alabama sheet plant. The design center in
Spartanburg, South Carolina will also be closed. The func-
tions performed in Spartanburg will continue in Memphis,
Tennessee. Charges associated with the consolidation and
improvement of the Industrial Packaging business total
$21 million and include $7 million of asset write-downs, a
$12 million severance charge covering the termination of
426 employees and other exit costs of $2 million.

(d) The Chemicals and Petroleum charge of $50 million is
related to the partial shutdown of the Chester-Le-Street
plant located in Northeast England and additional costs
related to the 1998 shutdown of the Springhill,
Louisiana plant. The Chester-Le-Street plant is currently
a fully integrated site comprised of a crude tall oil frac-
tionation plant, a rosin resin upgrading plant and a
dimer plant. The crude tall oil and rosin resin upgrading
facilities at the site will be closed and production shifted
to other Arizona Chemical facilities. Asset write-downs
for this plant total $30 million. A severance charge of $3
million covers the termination of 83 employees. Other
costs of $12 million include demolition and contract can-

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

cellations. We also recorded an additional charge of $5
million related to the 1998 closure of the Springhill
plant, covering other exit costs including demolition and
cleanup.

(e) The Building Materials charge of $16 million includes $3
million for a program to improve the profitability of the
decorative surfaces business and $13 million for the shut-
down of the Pilot Rock, Oregon mill. The Decorative
Products business has developed an improvement plan that
will result in the consolidation of certain manufacturing
activities and streamlining of administrative functions. As a
result, a reserve of $3 million was established to cover asset
write-offs totaling $2 million and severance charges of $1
million related to the reduction of 65 employees.
International Paper announced in October of 1999 that it
would shut down the Pilot Rock, Oregon mill due to excess
capacity within the Masonite manufacturing system. The
softboard production will be moved to our Ukiah, California
and Lisbon Falls, Maine facilities. The charge includes $8
million of asset write-downs, a $2 million severance charge
covering the termination of 155 employees and other exit
costs of $3 million.

(f) xpedx, our distribution business, implemented a plan to
consolidate duplicate facilities and eliminate excess
capacity. The $23 million charge associated with this
plan includes $6 million of asset write-downs, a sever-
ance charge of $5 million for the termination of 211
employees and other costs of $12 million. Other costs
consist primarily of lease cancellations.

(g) This charge is related to the shutdown of the No. 5

paper machine at Carter Holt Harvey’s Kinleith mill.
The machine had been idled due to a reconfiguration
project at the mill. Plans for alternative uses for the
machine were reexamined and it was determined that
based on current competitive conditions it would not
provide adequate returns on the capital required and that
it would be scrapped. Accordingly, the machine was
written down from its $20 million book value to its esti-
mated salvage value of $2 million. Also, severance costs
total $9 million and cover the costs of terminating 300
employees.

The $30 million pre-tax charge to increase existing legal

reserves includes $25 million which we added to our reserve
for hardboard siding claims. A further discussion of this
charge can be found in Note 11. Commitments and
Contingent Liabilities. The remaining $5 million is related to
other potential exposures.

The $36 million pre-tax credit for reserves no longer

required consists of $30 million related to a retained exposure
at the Lancey mill in France and $6 million of excess severance
reserves previously established by Union Camp. The Lancey
mill was sold to an employee group in October 1997. In April
1999, International Paper’s remaining exposure to potential
obligations under this sale was resolved, and the reserve was
returned to income in the second quarter.

The following table is a roll forward of the severance and other

costs included in the 1999 restructuring plans (in millions):

Opening Balance (second quarter 1999)

Additions (fourth quarter 1999)

1999 Activity

Cash charges

Balance, December 31, 1999

Severance
and Other
________

(34)
________

$ 115
________
________

The severance reserves recorded in the 1999 second and
fourth quarters related to 3,163 employees. As of December
31, 1999, 760 employees had been terminated.

Earnings
(Loss)
Before Income
Taxes and
Minority
Interest

1998
________________
Earnings
(Loss)
AfterIncome
Taxes and
Minority
In millions
Interest
____________________________ ________ _______
$ 345
Before special items
(68)
Oil and gas impairment charges
(92)
Restructuring and other charges
12
Gain on sale of business
50
Reversals of reserves no longer required
________ _______
$ 247
$ 429
________ _______
________ _______

$ 598
(111)
(161)
20
83

After special items

During 1998, we recorded $111 million of oil and gas

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

the full-cost method of accounting for oil and gas activities
require companies to perform a ceiling test on a quarterly
basis. As a result of low oil and gas prices, the value of our
properties was written down through these noncash charges.
Also in 1998, we recorded a $145 million pre-tax restruc-
turing charge ($82 million after taxes and minority interest
expense) consisting of $64 million of asset write-downs and
$81 million of severance costs and we recorded pre-tax charges
of $16 million ($10 million after taxes) related to our share of
write-offs taken by Scitex, a 13% investee company, related to
in-process research and development of an acquisition and its
exit from the digital video business. The Scitex items are
reflected as equity losses from the investment in Scitex in the
consolidated statement of earnings. In addition, we recorded a
$20 million pre-tax gain ($12 million after taxes) on the sale
of our Veratec nonwovens division, and an $83 million pre-tax
gain ($50 million after taxes) from the reversal of previously
established reserves that were no longer required. These
reserves were established in 1996 and 1997 and were primari-
ly associated with the Veratec and Imaging businesses. The
sales of these businesses were completed in 1998 and those
reserves not required were returned to earnings.

The following table and discussion presents additional detail

related to the $145 million restructuring charge:

In millions
_____________________________

Asset
Write-downs
Total
_________ ________ _____

Severance

Distribution

(a)

$ 20

$ 10

$ 30

Printing and Communications

Papers

Carter Holt Harvey

Industrial Packaging

Union Camp

Other

Total

(b)

(c)

(d)

(e)

(f)

_____

$ 64
_____
_____

15
_____

$ 81
_____
_____

15
_____

$ 145
_____
_____

(a) After the acquisition of Zellerbach, management of

xpedx decided to terminate certain software projects that
were in process and to use Zellerbach’s systems in certain
of its regions. Accordingly, we wrote off related deferred
software costs on these projects, resulting in a $20 mil-
lion charge. As part of the Zellerbach integration plan,
management determined that a significant part of the
personnel reduction related to the termination of employ-
ees at duplicate facilities and locations. The $10 million

severance charge represents the costs for terminating 274
xpedx employees. At December 31, 1999, all of the 274
employees had been terminated.

(b) Our Printing and Communications Papers business shut
down equipment at the Mobile, Alabama mill and
announced the termination of 750 employees at the Mobile,
Alabama, Lock Haven, Pennsylvania, and Ticonderoga, New
York mills. At the Mobile mill, International Paper perma-
nently shut down a paper machine and related equipment
with a net book value of $13 million. These assets were
written down to their estimated fair market value of zero.
The severance charge associated with the employee reduc-
tions at the 3 mills was $14 million. At December 31,
1999, all employees under this program had been terminat-
ed.

down associated with the closure of two Carter Holt
Harvey facilities, Myrtleford and Taupo. Myrtleford, a tis-
sue pulp mill located in Australia, was closed due to excess
capacity in its tissue pulp system. Carter Holt Harvey will
be able to produce the volume at lower costs at its
Kawerau tissue pulp mill located in New Zealand. Carter
Holt Harvey also decided to close the Taupo, New Zealand
sawmill due to excess capacity in its sawmill system as the
result of recent productivity improvements. The $3 mil-
lion severance charge represents the cost for terminating
236 employees. At December 31, 1999, all of the 236
employees had been terminated. Our consolidated finan-
cial statements included revenues of $21 million and $36
million and operating income of $1 million and $3 mil-
lion from these facilities in 1998 and 1997, respectively.

(d) Management decided to close the Gardiner, Oregon mill
because of excess capacity in International Paper’s con-
tainerboard system. As a result, the net plant, property
and equipment assets of this mill were reduced from $13
million to the estimated salvage value of $5 million. In
connection with the third-quarter decision to close this
mill, 298 employees at the mill were terminated and a
$7 million severance charge was recorded. This mill had
revenues of $78 million and $105 million and operating
losses of $16 million and $1 million in 1998 and 1997,
respectively.

(e) During 1998 Union Camp recorded a pre-tax special

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

charge of $40 million. Included in the charge was $32
million related to the termination of 540 positions and $8
million of asset write-downs. Approximately 190 positions
were related to a reorganization and restructuring of Union
Camp’s research and development activities. Another 190
positions were related to a consolidation of the packaging
group’s administrative support functions and the remain-
ing 160 positions were to be eliminated through a series of
other organizational changes. At December 31, 1999, all of
the 540 employees had been terminated.

The asset write-downs were principally attributable to

the impairment of goodwill specific to two packaging
businesses, the Chase packaging facility and Union
Camp’s 1996 purchase of a 50% interest in a packaging
plant in Turkey. Upon reviewing the historical and pro-
jected operating results for these businesses, management
concluded that expected future cash flows did not fully
support the carrying value of these assets.

(f) The $15 million severance charge was recorded as a

result of an announcement by International Paper of a
plan to consolidate its land and timber and logging and
fiber supply divisions into a new division called Forest
Resources and the consolidation of the Consumer
Packaging group. Of the $15 million charge, $10 million
related to a headcount reduction of 200 employees in the
Forest Resources group and the remaining $5 million
was based on a personnel reduction of 210 employees in
the Consumer Packaging group. At December 31, 1999,
all of the 410 employees had been terminated.

The following table is a roll forward of the severance costs

included in the 1998 restructuring plan (in millions):

Opening Balance (third quarter 1998)
1998 Activity
Cash charges
1999 Activity
Cash charges
Reserve reversal
Balance, December 31, 1999

Severance
________
$ 81

(19)

(56)
(6)
________
$ 0
________
________

The severance reserve recorded in the 1998 third quarter

related to 2,508 employees. As of December 31, 1999, all
employees had been terminated.

In millions
_____________________________
Before special items
Provision for legal reserve
Restructuring and other charges
Gain on sale of business

After special items

1997
________________

Earnings
(Loss)
Before Income
Taxes and
Minority
Interest
_______
$ 783
(150)
(660)
170
______
$
143
______
______

Earnings
(Loss)
After Income
Taxes and
Minority
Interest
_______
$ 381
(93)
(465)
97
______
$ (80)
______
______

In June 1997, a $535 million pre-tax business improve-
ment charge ($385 million after taxes) was recorded under a
plan to improve our financial performance through closing
or divesting of operations that no longer met financial or
strategic objectives. It included approximately $230 million
for asset write-downs, $210 million for the estimated losses
on sales of businesses and $95 million for severance and
other expenses. At this point, the anticipated pre-tax earn-
ings improvement of $100 million from the 1997 restruc-
turing actions has been largely realized. The earnings
improvement consists of $25 million of lower depreciation
expense and $75 million of lower cash costs.

The $230 million write-down of assets that International
Paper recorded in the second quarter of 1997 consisted pri-
marily of write-downs associated with assets to be sold or
shut down as follows (in millions):

Shutdown of European Papers facilities
Shutdown of U.S. Papers and Fine Papers facilities
Write-off of Haig Point real estate development
Other shutdowns

(a)
(b)
(c)

105
101
13
11
_______
$
230
_______
_______

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

(a) In the second quarter of 1997, management committed to
sell the Lancey, France mill to an employee group. We
wrote down the net carrying amount of the mill at June
30, 1997 by $65 million and established a reserve of $30
million to cover a retained exposure. This remaining
exposure was resolved in 1999. The sale closed in October
1997. Lancey had revenues of $52 million and an operat-
ing loss of $7 million in 1997. The Corimex, France mill
produced coated thermal fax paper, which is a market
that weakened in the mid-1990’s. During the second
quarter of 1997, management concluded that it would
continue to operate this mill but that the assets were
impaired. Based on an analysis of expected future cash
flows completed in accordance with Statement of
Financial Accounting Standards No. 121, “Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of,” we reduced the carrying value
of the Corimex mill from $12 million to $2 million,
resulting in a $10 million charge. The Corimex mill was
shut down in April 1999. Charges related to the shut-
down are included in the 1999 special charge. Corimex
had operating losses of $4 million in 1998 and $2 mil-
lion in 1997.

(b) The $101 million reserve related to the restructuring of

the Fine Papers manufacturing operations in the
Northeast ($51 million) and the shutdown of the deink-
ing facility at the Lock Haven, Pennsylvania mill ($50
million). The restructuring of the Fine Papers operations
included the shutdown of the Woronoco, Massachusetts
paper mill and 3 small paper machines at the Erie,
Pennsylvania mill. In the 1997 second quarter, we decid-
ed to close the deinking facility. Given that each of these
actions represented the permanent shutdown of equip-
ment or facilities, International Paper wrote down the
net carrying amount of the assets to zero. The Woronoco,
Massachusetts mill had revenues of $46 million and
operating earnings of $5 million in 1997.

named Haig Point at Daufuskie Island, South Carolina.
As the developer, International Paper was responsible for
operating this community until a specified number of
lots were sold, at which time we would turn the commu-
nity over to the homeowners. The net book value of our
investment in Haig Point was $13 million at June 30,

1997. Given continuing operating losses, $5 million in
1997 and an updated marketing study, we concluded that
the investment was permanently impaired and wrote it
down to zero. Operating losses of $1 million and
$500,000 were recorded in 1999 and 1998, respectively.

The $210 million for the estimated losses on sales of busi-

nesses related to the following (in millions):

Imaging
Veratec
Decorative Products
Label

(a)
(b)
(c)
(d)

150
25
20
15
_______
$
210
_______
_______

(a) We decided to sell our Imaging businesses in the second
quarter of 1997. Based on discussions with our invest-
ment banker and meetings with potential buyers,
International Paper believed that the most likely out-
come was to realize approximately $325 million. A
reserve of $150 million was established, which repre-
sented the estimated loss on the sale. We expected to
complete the sale of the Imaging businesses within one
year. The Imaging businesses had revenues of $690 mil-
lion and operating earnings of $9 million in 1997.

(b) The Veratec division had developed a business that was
based on an interspun technology for treating fabrics.
The net carrying value of this business was $25 million
at June 30, 1997. In June 1997, we decided to shut down
this business and recorded a reserve of $25 million. Prior
to the shutdown, this business had revenues of $2 mil-
lion and an operating loss of $7 million in 1997.

(c) In the second quarter of 1997, management decided to sell
the medium-density fiberboard, low-pressure laminates
and particleboard businesses. We estimated the expected
sales prices for each of these businesses and recorded a
reserve of $20 million to reduce the net carrying amounts
to these levels. We expected to complete the sales of these
businesses within one year. These businesses had revenues
of $196 million and operating losses of $1 million in 1997.

(d) In the second quarter of 1997, management committed to
a plan to sell the label business. The estimated total loss on
the label business sale included in the second-quarter 1997
restructuring charge was $15 million. The label business

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

was sold in May of 1998. The label business had revenues
of $24 million and an operating loss of $2 million in 1997.

ond quarter. Accordingly, we wrote the license down to
zero.

The $95 million of severance and other expenses consists

(e) The charge of $22 million relates to other exit costs.

In December 1997, an additional pre-tax charge of $125
million ($80 million after taxes) was recorded for anticipat-
ed losses associated with the sale of the remaining Imaging
businesses. Such amount was determined after consideration
of the sales of certain of the Imaging businesses that had
been completed and the estimated proceeds from the busi-
nesses remaining to be sold. The remaining Imaging busi-
nesses were sold in 1998.

Also included in the 1997 special items was a $150 mil-

lion provision to increase our legal reserves as a result of a
settlement by Masonite Corporation, a wholly-owned sub-
sidiary, of a class-action lawsuit relating to its hardboard
siding product. A more detailed discussion of this legal set-
tlement is included in Note 11. to the financial statements.
The following table is a roll forward of the severance and
other costs included in the 1997 restructuring plan (in mil-
lions):

Opening Balance (second quarter 1997)
1997 Activity

Asset write-downs
Cash charges

Balance, December 31, 1997
1998 Activity

Asset write-downs
Reserve reversals
Cash charges

Balance, December 31, 1998
1999 Activity
Cash charges

Balance, December 31, 1999

Severance
and
Other
________
95
$

(18)
(15)
________
62

(4)
(9)
(40)
________
9

(9)
0

________
$
________
________

of the following (in millions):

Severance
Write-off of deferred software costs
Lease buyouts at warehouses
Write-off of deinking process license
Other exit costs

(a)
(b)
(c)
(d)
(e)

$ 42
18
9
4
22
_____
$ 95
_____
_____

(a) The $42 million severance charge relates to programs
initiated and approved in the 1997 second quarter in
the Printing and Communications Papers, Industrial and
Consumer Packaging segments and corporate staff
groups to reduce headcount by 3,015 employees under
our existing ongoing severance plans. We recorded the
charge in the second quarter as (1) management had
committed to the plan of termination, (2) the benefit
arrangement had been communicated to the employees,
(3) the number of employees, their functions and loca-
tions had been identified, and (4) all terminations were
to be completed in approximately one year. As of
December 31, 1999, all employees had been terminated
under these programs.

(b) The $18 million charge for the write-off of deferred soft-
ware costs relates to two items as follows: (1) during the
1997 second quarter, a human resources software pro-
ject, for which $11 million of deferred software costs
had been recorded, was cancelled and (2) as a result of
the decision to sell certain businesses in the second
quarter of 1997, we decided to terminate enterprise soft-
ware projects in these businesses, for which we had
recorded $7 million of deferred software costs.

obligations under existing warehouse leases. A decision to
close these warehouses was made in the second quarter of
1997.

(d) The $4 million charge represents the write-off of the net
carrying value of the deinking process license that had
been acquired from a third party. International Paper
permanently shut down this operation in the 1997 sec-

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

O N G O I N G P R O F I T I M P R O V E M E N T R E V I E W

International Paper continually evaluates its operations for

improvement. When any such plans are finalized, we may
incur costs or charges in future periods related to improve-
ment plans when and if such plans are implemented.

I N C O M E T A X E S

Before special items, the 1999 effective income tax rate
was 28% of pre-tax earnings, increasing from 26% in 1998
and decreasing from 34% in 1997. The effective income tax
rates are below the U.S. statutory tax rate primarily because
of the geographic mix of overall taxable earnings and the
impact of state tax and other credits, both of which were
more pronounced in 1999 and 1998 than in 1997. After
special items, the effective income tax rate was 19%, 22%
and 58% for 1999, 1998 and 1997, respectively. We esti-
mate that the 2000 effective income tax rate will be approx-
imately 31% based on expected earnings and business con-
ditions, which are subject to change.

The following tables present the impact of the special
items on the effective income tax rate for the three years.
Taxes on special charges were provided at statutory rates
except for those charges that represent tax deductions that
management does not believe will be realized.

1999
__________________________________

Earnings (Loss)
Income
Before
Tax
Income Taxes
Provision
and Minority
(Benefit)
Interest
________ ______
$ 281
$1,005

(148)
(107)
(298)
(10)
(30)

(51)
(29)
(108)
(4)
(12)

36
______
$ 448
______
______

9
______
$
86
______
______

Effective
Tax
Rate
______
28%

34%
27%
36%
40%
40%

25%
19%

1998
_________________________________

Earnings (Loss)
Income
Before
Tax
Income Taxes
and Minority
Provision
(Benefit)
Interest
________ ______
$ 158
$ 598
(43)
(111)
(61)
(161)
8
20

83
______
$ 429
______
______

33
______
$
95
______
______

Effective
Tax
Rate
______
26%
39%
38%
40%

40%
22%

1997
_________________________________

Earnings (Loss)
Income
Before
Tax
Income Taxes
Provision
and Minority
(Benefit)
Interest
________ ______
$ 268
$ 783
(57)
(150)
(195)
(660)
67
170
______
______
$
$ 143
83
______
______
______
______

Effective
Tax
Rate
______
34%
38%
30%
39%
58%

In millions
_____________________________
Before special and extraordinary items
Union Camp merger-related
termination benefits
One-time merger expenses
Restructuring and other charges
Environmental remediation charge
Provision for legal reserves
Reversal of reserves no longer
required
After special items

In millions
_____________________________
Before special items
Oil and gas impairment charges
Restructuring and other charges
Gain on sale of business
Reversals of reserves no longer
required
After special items

In millions
_____________________________
Before special items
Provision for legal reserve
Restructuring and other charges
Gain on sale of business
After special items

R E C E N T A C C O U N T I N G D E V E L O P M E N T S

In June 1998, the Financial Accounting Standards Board

issued Statement of Financial Accounting Standards No.
133, “Accounting for Derivative Instruments and Hedging
Activities.” The Statement establishes accounting and
reporting standards requiring that every derivative instru-
ment (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an
asset or liability measured by its fair value. The Statement
requires that changes in the derivative’s fair value be recog-
nized currently in earnings unless specific hedge accounting

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

criteria are met. Special accounting for qualifying hedges
allows a derivative’s gains and losses to offset related results
on the hedged item in the income statement and requires
that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge
accounting.

The Statement is effective for fiscal years beginning after

June 15, 2000. A company may also implement the
Statement as of the beginning of any fiscal quarter after
issuance. The Statement cannot be applied retroactively. The
Statement must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid con-
tracts that were issued, acquired, or substantively modified
after December 31, 1997 (and, at the company’s election,
before January 1, 1998).

We have not quantified the impact of adopting the

Statement on our consolidated financial statements nor have
we determined the timing of or method of the adoption.
However, adoption of the provisions of the Statement could
increase volatility in earnings and other comprehensive
income.

L E G A L A N D E N V I R O N M E N T A L I S S U E S

International Paper operates in an industry subject to

extensive federal and state environmental regulation.
Controlling pollutants discharged into the air, water and
groundwater to avoid adverse impacts on the environment,
making continual improvements in environmental perfor-
mance, and maintaining 100% compliance with applicable
laws and regulations are continuing requirements of
International Paper. A total of $90 million was spent in 1999
for capital projects to control environmental releases into the
air and water and to assure environmentally sound manage-
ment and disposal of waste. We expect to spend approximate-
ly $257 million in 2000 for similar capital projects, including
the costs to comply with the Environmental Protection
Agency’s (EPA) Cluster Rule regulations. Amounts to be
spent for environmental control projects in future years will
depend on new laws and regulations and changes in legal
requirements and environmental concerns. Taking these
uncertainties into account, our preliminary estimate for 2001
and 2002 is approximately $157 million in total.

On April 15, 1998, the EPA issued final Cluster Rule regu-
lations that established new requirements regarding air emis-
sions and wastewater discharges from pulp and paper mills to
be met between now and 2006. One of the requirements of
the Cluster Rule is that pulp and paper mills use only ele-

mental chlorine-free (ECF) technology in the pulp bleaching
process. We have spent $247 million through 1999 to con-
vert 15 of our U.S. and European bleached mills to this tech-
nology and for certain other projects related to the Cluster
Rule regulations. The projected costs included in our estimate
related to the Cluster Rule regulations for the years 2000
through 2001 are $229 million. Projected Cluster Rule costs
for 2002 through 2006 are in the range of $150 million to
$195 million. The final cost depends on the outcome of the
Cluster Rule water regulations for pulp and paper categories
other than bleached kraft and soda. Regulations for these cat-
egories are not likely to become final until late 2000 or 2001.
We estimate that annual operating costs, excluding deprecia-
tion, will increase approximately $20 million when these reg-
ulations are fully implemented.

International Paper has been named as a potentially liable
party in a number of environmental remediation actions under
various federal and state laws, including the Comprehensive
Environmental Response, Compensation and Liability Act.
Related costs are recorded in the financial statements when
they are probable and reasonably estimable. Completion of
these actions is not expected to have a material adverse effect
on our financial condition or results of operations.

Masonite Litigation

Three nationwide class action lawsuits filed against

International Paper have been settled. The first suit alleged
that hardboard siding manufactured by Masonite fails prema-
turely, allowing moisture intrusion that in turn causes damage
to the structure underneath the siding. The class consisted of
all U.S. property owners having Masonite hardboard siding
installed on and incorporated into buildings between 1980
and January 15, 1998. Final approval of the settlement was
granted by the Court on January 15, 1998. The settlement
provides for monetary compensation to class members meeting
the settlement requirements on a claims-made basis. It also
provides for the payment of attorneys’ fees equaling 15% of
the settlement amounts paid to class members, with a nonre-
fundable advance of $47.5 million plus $2.5 million in costs.
The second suit made similar allegations with regard to

Omniwood siding manufactured by Masonite (the
“Omniwood Lawsuit”). The class consists of all U.S. property
owners having Omniwood siding installed on and incorporat-
ed into buildings from January 1, 1992 to January 6, 1999.
The third suit alleged that Woodruf roofing manufac-
tured by Masonite is defective and causes damage to the

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

structure underneath the roofing (the “Woodruf Lawsuit”).
The class consists of all U.S. property owners on which
Masonite Woodruf roofing has been incorporated and
installed from January 1, 1980 to January 6, 1999.

Final approval of the settlements of the Omniwood and
Woodruf lawsuits was granted by the Court on January 6,
1999. The settlements provide for monetary compensation
to class members meeting the settlement requirements on a
claims-made basis, and provides for payment of attorneys’
fees equaling 13% of the settlement amounts paid to class
members with a nonrefundable advance of $1.7 million plus
$75,000 in costs for each of the two cases.

Our reserves for these matters total $76 million at
December 31, 1999. This amount includes $25 million
which we added to our reserve for hardboard siding claims
in the fourth quarter of 1999, to cover an expected shortfall
in that reserve resulting primarily from a higher number of
hardboard siding claims in the fourth quarter of 1999 than
we had anticipated. It is reasonably possible that the higher
number of hardboard siding claims might be indicative of
the need for one or more future additions to this reserve.
However, whether or not any future additions to this reserve
become necessary, International Paper believes that these
settlements will not have a material adverse effect on our
consolidated financial position or results of operations. The
reserve balance is net of $51 million of expected insurance
recoveries (apart from the insurance recoveries to date).
Through December 31, 1999, settlement payments of $183
million, including the $51 million of nonrefundable
advances of attorney’s fees discussed above, have been made.
Also, we have received $27 million from our insurance carri-
ers through December 31, 1999. International Paper and
Masonite have the right to terminate each of the settlements
after seven years from the dates of final approval.

Linerboard Litigation

On May 14, 1999 and May 18, 1999, two lawsuits were
filed against International Paper, the former Union Camp
Corporation and other manufacturers of linerboard alleging
that the defendants conspired to fix prices for linerboard and
corrugated sheets during the period October 1, 1993
through November 30, 1995. Both lawsuits were filed seek-
ing nationwide class certification. The lawsuits allege that
various purchasers of corrugated sheets and corrugated con-
tainers were injured as a result of the alleged conspiracy. The
cases have been consolidated in federal court in the Eastern

District of Pennsylvania. Motions to dismiss the cases are
pending before the Court.

COPEC

International Paper’s majority-owned subsidiary, Carter
Holt Harvey, had an indirect shareholding of 30.05% in
Chile’s largest industrial company, COPEC, through Carter
Holt Harvey’s subsidiary, Carter Holt Harvey International.
This shareholding was held through Carter Holt Harvey
International’s 50% interest in Inversiones y Desarrollo Los
Andes S.A. (“Los Andes”), which held 60.1% of the shares
of COPEC. The other 50% of Los Andes was owned by
Inversiones Socoroma S.A. (“Socoroma”), a Chilean invest-
ment company. In late 1993, Carter Holt Harvey
International commenced several actions in Chilean courts
challenging certain corporate governance documents of Los
Andes, as well as agreements between Carter Holt Harvey
and Socoroma. All of those actions have now been terminat-
ed. In December 1994, Socoroma commenced an arbitration
action seeking to expel Carter Holt Harvey International
from Los Andes. In April 1998, the arbitrator dismissed
Socoroma’s request, but granted it the right to claim mone-
tary damages for what he found was Carter Holt Harvey
International’s breach of certain of its obligations as a partic-
ipant in the Los Andes joint venture. All of the foregoing
litigation has been settled. As part of the settlement, on
January 3, 2000, AntarChile, S.A. purchased Carter Holt
Harvey’s interest in COPEC for just over $1.2 billion.

Other Litigation

In April 1999, the Franklin, Virginia mill received a
Notice of Violation (“NOV”) from the U.S. Environmental
Protection Agency (“EPA”), Region 3 in Philadelphia, and
an NOV from the Commonwealth of Virginia alleging that
the mill violated the Prevention of Significant Deterioration
(“PSD”) regulations. The Franklin mill was owned by Union
Camp Corporation at that time and was one of seven paper
mills in Region 3 owned by different companies which
received similar notices of violation. Union Camp merged
with International Paper on April 30, 1999, and
International Paper has entered into negotiations with the
EPA and the Commonwealth of Virginia.

The Franklin mill NOVs were issued in connection with
the EPA’s well publicized PSD air permit enforcement ini-
tiative against the paper industry. In 1999, our paper mills
in Kaukauna, Wisconsin and Augusta, Georgia received

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

requests for information from the EPA regarding compliance
with the PSD regulations. The EPA’s initiative may result in
similar actions at other facilities.

On August 5, 1999, International Paper and the New
York Department of Environmental Conservation entered
into a consent order which resolved several alleged air per-
mit violations at our paper mill in Ticonderoga, New York,
for a civil penalty of $100,000.

In August 1998, the former Union Camp Corporation

informed the Virginia Department of Environmental
Quality (“DEQ”) of certain New Source Performance
Standards (“NSPS”) permitting discrepancies related to a
power boiler at the paper mill in Franklin, Virginia. On
August 11, 1999, the DEQ proposed a consent order with a
civil penalty exceeding $100,000. Terms of the consent
order, including the penalty, are being negotiated with the
DEQ.

In November 1999, the Wisconsin Department of
Natural Resources filed a civil complaint alleging past
exceedences of air permit limits at the former Union Camp
flexible packaging facility located in Tomah, Wisconsin.
The complaint seeks penalties that could exceed $100,000.
International Paper is engaged in settlement discussions
with the state.

We are also involved in other contractual disputes, admin-

istrative and legal proceedings and investigations of various
types. While any litigation, proceeding or investigation has
an element of uncertainty, we believe that the outcome of any
proceeding, lawsuit or claim that is pending or threatened, or
all of them combined, will not have a material adverse effect
on our consolidated financial position or results of operations.

I M P A C T O F E U R O

The introduction of the euro for noncash transactions
took place on January 1, 1999, with 11 countries participat-
ing in the first wave: Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal
and Spain. There has been an irrevocable locking of
exchange rates between each of the participating countries’
national currencies and the new euro currency, which
became a currency in its own right. The euro has begun
trading on world currency exchanges and may be used in
business transactions. On January 2, 2002, new euro-
denominated bills and coins will be issued and legacy cur-
rencies will be completely withdrawn from circulation that
year. In general, the euro is expected to increase price trans-
parency for our products in Europe. The major impact to

International Paper will be to its businesses within the euro
zone, which make up approximately 10% of sales. Each of
our European businesses has a plan in place to deal with the
introduction of the euro.

Over the three year transition period, our computer sys-
tems will be updated to ensure euro compliance. Also, we
are reviewing our marketing and operational policies and
procedures to ensure our ability to continue to successfully
conduct all aspects of our business in this new market. In
general, our product lines are likely to become somewhat
more international, with some leveling of prices that is not
expected to significantly impact our operations. We antici-
pate that the total costs in connection with the euro conver-
sion will not be material. Further, we do not anticipate that
the conversion from the legacy currencies to the euro will
have a material adverse effect on our consolidated financial
position or results of operations.

Y E A R 2 0 0 0 R E A D I N E S S

The Year 2000 problem concerns the inability of systems
to properly recognize and process date-sensitive information
beyond January 1, 2000.

We have not experienced any significant issues associated
with the Year 2000 and to our knowledge and belief are not
aware of any incidents which may have affected the safety of
our employees or the environment, customer service or pro-
duction. Our locations worldwide are operating normally
and according to schedule. Although some problems were
noted, they were quickly corrected and were insignificant.

We completed the necessary testing, remediation and final
action plans at our facilities, including the facilities acquired
in our merger with Union Camp, in an effort to ensure that
we entered the Year 2000 without a material disruption to
our customers. The program covered information systems
infrastructure, financial and administrative systems, process
control and manufacturing operating systems. It also includ-
ed readiness assessment of significant vendors and customers,
as well as a contingency and continuing compliance plan.
The Year 2000 Program Office, a centralized department
which coordinated Year 2000 efforts throughout
International Paper, is in the process of disbanding.

We adopted a 9-step process toward Year 2000 readiness:
(1) planning and awareness; (2) inventory; (3) triage (assess
risks and prioritize efforts); (4) detailed assessment (identifica-
tion of where failures may occur, solutions and workarounds,
and plans to repair or replace); (5) resolution (repair, replace
or retire systems that cannot properly process Year 2000

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

dates; create bridges to other systems and perform unit test-
ing); (6) test planning; (7) test execution (some manufactur-
ing systems require scheduling of equipment downtime); (8)
deployment of compliant systems; and (9) fallout (remove
bridges and patches; recertify). These steps were completed.
We rely on third-party suppliers for raw materials, water,
utilities, transportation and other key services. We are also
dependent upon our customers for sales and cash flow. An
ongoing program was instituted to evaluate the status of our
suppliers’ and customers’ efforts and to determine alterna-
tives and contingency plan requirements. This program
included both written correspondence and on-site visits to
assess their readiness. We received assurances from our key
suppliers and customers that they would be able to handle
the transition to the Year 2000. We believe that no individ-
ual supplier or customer is material to our total business.

The incremental Year 2000-related costs were $85 million

which was well within our estimated range of $90 million
plus or minus 10%. This cost excludes software and systems
that are being replaced or upgraded in the normal course of
business. The majority of these costs related to production
facility systems. We utilized internal personnel, contract
programmers and vendors to complete the project.

E F F E C T O F I N F L A T I O N

General inflation has had minimal impact on our operat-
ing results in the last three years. Sales prices and volumes
are more strongly inf luenced by supply and demand factors
in specific markets and by exchange rate f luctuations than
by inflationary factors.

M A R K E T R I S K

We use financial instruments, including fixed and variable
rate debt, to finance operations, for capital spending programs
and for general corporate purposes. Additionally, financial
instruments, including swap and forward contracts, are used to
hedge exposures to interest rate and foreign currency risks. We
do not use financial instruments for trading purposes.

Our exposure to market risk for changes in interest rates

relates primarily to investments in marketable securities,
and short- and long-term debt obligations. We invest in
high-credit-quality securities with major international
financial institutions while limiting exposure to any one
issuer. Our debt obligations outstanding as of December 31,
1999, expressed in U.S. dollar equivalents, are summarized
as to their principal cash flows and related weighted average
interest rates by year of maturity in the following table. Our
investments in marketable securities at December 31, 1999
were not significant.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

Short- and Long-Term Debt (in millions)

Outstanding as of December 31, 1999
____________________________________
U.S. commercial paper and

bank notes – 6.6% average interest rate

New Zealand dollar commercial

paper and bank notes – 5.6% average interest rate

Australian dollar commercial

paper and bank notes – 5.7% average interest rate

Chinese renminbi bank notes -

6.5% average interest rate

Euro bank notes – 3.3% average interest rate
New Zealand dollar notes

payable - 6.2% average interest rate
Fixed rate debt – 7.9% average interest rate
5 7/8% Swiss franc debentures
Medium-term notes - 8.3% average interest rate
Environmental and industrial

development bonds - 6.1% average interest rate

German mark fixed rate

borrowings - 4.7% average interest rate

Euro fixed rate borrowings -

5 3/8% average interest rate

Other
Total Debt

2000
______

2001
_____

2002
_____

2003
_____

2004
_____

Thereafter
________

Total
______

Fair Value
________

$ 307

436

271

19
133

510
373

$ 307

436

271

19
133

510
4,294
68
331

1,352

132

436

271

19
133

510
4,336
70
336

1,350

132

$ 289
68
145

$ 389

$ 239

$ 688

$ 2,316

1,179

114
______
$2,245
______
______

46
_____
$ 613
_____
_____

56
_____
$ 640
_____
_____

5
_____
$ 300
_____
_____

6
_____
$ 744
_____
_____

249
111
______
$ 3,898
______
______

249
338
______
$ 8,440
______
______

244
340
______
$ 8,484
______
______

For debt obligations, the table presents principal cash flows
and related weighted average interest rates by year of maturi-
ty. Variable interest rates disclosed represent the weighted
average rates at the end of the period. For financial statement
classification, $1.5 billion of short-term debt has been classi-
fied as long-term pursuant to line of credit agreements.

We use cross-currency and interest rate swap agreements

to manage the composition of our fixed and floating rate

debt portfolio. Amounts to be paid or received as interest
under these agreements are recognized over the life of the
swap agreements as adjustments to interest expense. The
impact on earnings and our net liability under these agree-
ments was not significant. Our cross-currency and interest
rate swap agreements outstanding at December 31, 1999,
expressed in U.S. dollar equivalents, by year of maturity, are
presented in the following table.

Interest Rate and Currency Swaps (in millions)

Outstanding as of December 31, 1999
____________________________________
U.S. dollar variable to fixed rate swaps

2000
______

2001
_____

2002
_____
$45

2003
_____
$200

2004
_____
$300

Thereafter
________
$500

Total
______
$1,045

Fair Value
________
$16

Average pay rate 7.3%
Average receive rate 6.1%

Australian dollar variable to fixed rate swaps

Average pay rate 6.0%
Average receive rate 5.4%

New Zealand dollar variable to fixed rate swaps

Average pay rate 6.8%
Average receive rate 5.4%

U.S. dollar fixed to variable rate swaps

Average pay rate 7.4%
Average receive rate 6.6%

U.S. dollar to Australian dollar cross-currency swap
Swiss franc to New Zealand dollar cross-currency swaps

$48

176

140

200

550

500

1,295

150
75

(25)

(4)
(8)

$48

150

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S

We also transact business in many currencies and are sub-

V A L U E A T R I S K

ject to currency exchange rate risk. We address this risk
through a risk management program that involves financing
a portion of our investments in overseas operations with bor-
rowings denominated in the same currency as the invest-
ment or by entering into currency exchange contracts in tan-
dem with U.S. dollar borrowings. These contracts are effec-
tive in providing hedges against fluctuations in currency
exchange rates. Additionally, we utilize currency exchange
contracts to hedge certain transactions that are denominated
in foreign currencies, primarily export sales and equipment
purchased from nonresident vendors. These contracts serve
to protect us from currency fluctuations between the trans-
action and settlement dates.

The following table presents information about our for-
eign currency forward contracts outstanding as of December
31, 1999, expressed in U.S. dollar equivalents. The majority
of the contracts have maturities of less than 12 months. This
information should be read in conjunction with Note 14. to
the consolidated financial statements which can be found on
pages 52 and 53.

Foreign Currency Forward Contracts
(U.S. dollars in millions)

Outstanding as of December 31, 1999
________________________________
Receive Australian dollars / Pay New Zealand dollars

Receive German marks / Pay British pounds

Receive European euros / Pay U.S. dollars

Receive European euros / Pay British pounds

Receive British pounds / Pay U.S. dollars

Receive British pounds / Pay European euros

Receive New Zealand dollars / Pay Australian dollars

Receive New Zealand dollars / Pay U.S. dollars

Receive Swedish kronas / Pay U.S. dollars

Receive U.S. dollars / Pay European euros

Receive U.S. dollars / Pay British pounds

Receive U.S. dollars / Pay New Zealand dollars

Contract
Amount
_____
20
$

1,063

107

117

499

Weighted
Average
Exchange
Rate
______
0.79

Net
Unrealized
Gain
(Loss)
______
(1)
$

3.00

0.95

1.58

0.62

0.63

1.23

1.94

8.09

1.07

1.61

0.56

(3)

(1)

(5)

We have an additional $71 million in a number of smaller

contracts to purchase or sell other currencies with a related
net unrealized immaterial gain.

Value at risk is used to describe an approach for measur-
ing market risk exposure that utilizes statistical models that
are based on historical price and volatility patterns to estimate
the probability of the value of a financial instrument falling
above or below a specified amount at a specified confidence
level and over a given time period. Our analysis uses variance-
covariance statistical modeling techniques and includes sub-
stantially all interest rate-sensitive debt and swaps, and curren-
cy exchange contracts. The model estimates the potential loss
in fair market value or earnings we could incur from adverse
changes in interest rates or currency exchange rates. We believe
that any loss incurred would be substantially offset by the
effects of interest rate or currency exchange movements on the
respective underlying hedged transactions. The results of our
analysis at a 95% confidence level were not significant to our
consolidated common shareholders’ equity, earnings or daily
change in market capitalization.

F O R W A R D - L O O K I N G S T A T E M E N T S

Certain statements in this 1999 Annual Report to

Shareholders that are not historical in nature may consti-
tute forward-looking statements. These statements are
often identified by the words, “believe,” “expect,” “plan,”
“project,” “intend,” and words of similar import. Such state-
ments reflect the current views of International Paper with
respect to future events and are subject to risks and uncer-
tainties. Actual results may differ materially from those
expressed or implied in these statements. Factors which
could cause actual results to differ include, among other
things, changes in overall demand, changes in domestic or
foreign competition, changes in the cost or availability of
raw materials, the cost of compliance with environmental
laws and regulations, and whether anticipated savings from
merger and other restructuring activities can be achieved. In
view of such uncertainties, investors are cautioned not to
place undue reliance on these forward-looking statements.
International Paper does not assume any obligation to
update these forward-looking statements.

F I N A N C I A L I N F O R M A T I O N B Y I N D U S T R Y S E G M E N T

A N D G E O G R A P H I C A R E A

I N D U S T R Y S E G M E N T A N D G E O G R A P H I C A R E A

F I N A N C I A L I N F O R M A T I O N B Y I N D U S T R Y S E G M E N T

I N F O R M A T I O N

For information about our industry segments, see the
"Description of Industry Segments" included in management’s
discussion and analysis of financial condition and results of
operations. The segment and geographic area information has
been restated to include Union Camp for all years presented.
For management purposes, we report the operating perfor-
mance of each business based on earnings before interest and
income taxes ("EBIT") excluding special and extraordinary
items and gains or losses on sales of businesses. Our Carter
Holt Harvey segment includes our share, about half, of Carter
Holt Harvey’s operating earnings adjusted for U.S. generally
accepted accounting principles. The remaining half is includ-
ed in the minority interest adjustment. Intersegment sales
and transfers are recorded at current market prices. Corporate
sales include the Imaging and Veratec businesses that were
sold in 1998 and 1997. Corporate operating profit also
includes these businesses as well as corporate expenses.
Corporate assets include these businesses for the applicable
years in addition to other assets not allocated to our segments.
Sales for these businesses were $220 million in 1998 and
$938 million in 1997. These businesses recorded an operating
loss of $2 million in 1998 and operating profits of $27 mil-
lion in 1997.

External Sales by Major Product is determined by aggregat-
ing sales from each segment based on similar products or ser-
vices. External sales are defined as those that are made to par-
ties outside International Paper’s consolidated group whereas
sales by segment in the Net Sales table are determined by the
management approach and include intersegment sales.

Capital Spending by Industry Segment is reported on page
13 of management’s discussion and analysis of financial condi-
tion and results of operations.

NET SALES
In millions
_____________________________
Printing and Communications Papers
Industrial and Consumer Packaging
Distribution
Chemicals and Petroleum
Forest Products
Carter Holt Harvey
Corporate and Intersegment Sales (1)

Net Sales

ASSETS
In millions
_____________________________
Printing and Communications Papers
Industrial and Consumer Packaging
Distribution
Chemicals and Petroleum
Forest Products
Carter Holt Harvey (2)
Corporate (1)

Assets

OPERATING PROFIT
In millions
_____________________________
Printing and Communications Papers
Industrial and Consumer Packaging
Distribution
Chemicals and Petroleum
Forest Products
Carter Holt Harvey (3)

Operating Profit
Interest expense, net
Minority interest adjustment (3)
Corporate items, net (1)
Merger integration costs
Environmental remediation charge
Provision for legal reserves
Restructuring and other charges
Oil and gas impairment charges
Scitex restructuring and

other charges

Reversals of reserves no longer

1999
_______
$ 5,930
7,050
6,850
1,455
3,205
1,605
(1,522)
_______
$24,573
_______
_______

1998
1997
______
_______
$ 5,915 $ 6,415
6,785
5,250
1,585
3,025
1,955
(459)
_______ _______
$ 23,979 $ 24,556
_______ _______
_______ _______

7,010
6,280
1,465
2,930
1,505
(1,126)

1999
_______
$ 7,929
7,316
1,893
1,531
3,819
4,183
3,597
_______
$30,268
_______
_______

1999
_______
$
255
560
105
125
725
40
_______
1,810
(541)
74
(338)
(255)
(10)
(30)
(298)

1997
1998
_______
______
$ 8,213 $ 8,458
6,823
1,370
2,033
3,845
4,953
4,489
_______ _______
$31,466 $ 31,971
_______ _______
_______ _______

7,389
1,903
1,614
3,644
4,475
4,228

1998
_______
$

180 $
335
85
135
620
20

1997
______
245
260
90
180
615
90
_______ _______
1,480
(607)
165
(255)

1,375
(614)
57
(220)

(145)
(111)

(16)

83
20

(150)
(660)

170

_______ _______
143
429 $
$
_______ _______
_______ _______

required

Gains on sales of businesses
Earnings Before Income Taxes, Minority _______
$
448
_______
_______

Interest and Extraordinary Item

F I N A N C I A L I N F O R M A T I O N B Y I N D U S T R Y S E G M E N T

A N D G E O G R A P H I C A R E A

RESTRUCTURING AND OTHER CHARGES
1999
In millions
_______________________________ _______
Printing and Communications Papers
55
Industrial and Consumer Packaging
114
Distribution
23
Chemicals and Petroleum
63
Forest Products
16
Carter Holt Harvey
27
Corporate

1998
_______
32
$
46
31
4
14
18

Restructuring and Other Charges

_______ _______
$
145
_______ _______
_______ _______

298

1997
_______
186
$
48
16
29
66

315
_______
$
660
_______
_______

DEPRECIATION, DEPLETION AND AMORTIZATION
1999
In millions
_______________________________ _______
Printing and Communications Papers
556
Industrial and Consumer Packaging
466
Distribution
32
Chemicals and Petroleum
99
Forest Products
196
Carter Holt Harvey
201
Corporate
115

1998
_______
535
$
447
25
106
218
193
136
_______ _______
1,660
166
_______ _______
$ 1,520
$ 1,494
_______ _______
_______ _______

1,665
145

Depreciation, Depletion and Amortization
Less: Depletion (4)

Depreciation and Amortization

1997
_______
577
$
459
22
109
217
202
152
_______
1,738
168
_______
$ 1,570
_______
_______

EXTERNAL SALES BY MAJOR PRODUCT
1999
In millions
_______________________________ _______
$ 5,069
Printing Papers
Packaging
7,361
Distribution
6,926
Chemicals and Petroleum
1,458
Forest Products
3,759
Corporate Sales (1)

1998
_______
$ 5,475
7,360
6,235
1,230
3,430
249
_______ _______
$24,573
$23,979
_______ _______
_______ _______

Net Sales

1997
_______
$ 6,015
7,115
5,165
1,320
3,850
1,091
_______
$24,556
_______
_______

F I N A N C I A L I N F O R M A T I O N B Y G E O G R A P H I C A R E A

1999

NET SALES (1)
1998
In millions
_______________________________ _______ _______
United States (2)
$18,682
Europe
3,251
Pacific Rim (3)
1,731
Other
315
_______ _______
$24,573
$23,979
_______ _______
_______ _______

$19,152
3,257
1,865
299

Net Sales

1999

EUROPEAN SALES BY INDUSTRY SEGMENT
1998
In millions
_______________________________ _______ _______
Printing and Communications Papers
$ 1,423
Industrial and Consumer Packaging
772
Distribution
323
Chemicals and Petroleum
465
Forest Products
208
60
Other Businesses
_______ _______
$ 3,257
$ 3,251
_______ _______
_______ _______

$ 1,514
750
347
446
200

European Sales

1999

LONG-LIVED ASSETS (4)
1998
In millions
_______________________________ _______ _______
United States
$13,149
Europe
2,101
Pacific Rim (3)
2,793
Other
74
Corporate
296
_______ _______
$17,302
$18,413
_______ _______
_______ _______

$12,325
1,888
2,625
77
387

Long-Lived Assets

1997
_______
$ 18,317
3,680
2,217
342
_______
$ 24,556
_______
_______

1997
_______
$ 1,675
765
232
494
119
395
_______
$ 3,680
_______
_______

1997
_______
$13,308
2,057
3,048
131
436
_______
$18,980
_______
_______

(1) Revenues are attributed to countries based on location of

seller.

(2) Export sales to unaffiliated customers (in billions) were

(1) Includes results or assets, as applicable, from operations

$1.5 in 1999 and 1998 and $1.8 in 1997.

that were disposed of in 1998 and 1997.

(3) Operations in New Zealand and Australia account for

(2) Includes an equity investment (in millions) of $876 in

most of the Pacific Rim amounts.

1999, $956 in 1998 and $974 in 1997.

(4) Long-Lived Assets includes Forestlands and Plants,

(3) Includes equity earnings (in millions) of $54 in 1999,

Properties and Equipment, Net.

$20 in 1998 and $65 in 1997. Half of these equity earn-
ings amounts are in the Carter Holt Harvey segment
and half are in the minority interest adjustment.
(4) Depletion consists of Cost of Timber Harvested and is

included in the Forest Products and Carter Holt Harvey
segments.

R E P O R T O F M A N A G E M E N T O N F I N A N C I A L S TAT E M E N T S
The management of International Paper Company is responsi-
ble for the fair presentation of the information contained in the
financial statements in this annual report. The statements are
prepared in accordance with U.S. generally accepted accounting
principles and reflect management’s best judgment as to our
financial position, results of operations and cash flows.
International Paper maintains a system of internal

accounting controls designed to provide reasonable assurance
that transactions are properly recorded and summarized so
that reliable financial records and reports can be prepared and
assets safeguarded.

An important part of the internal controls system is our

ethics program: including our long-standing policy on
Ethical Business Conduct, which requires employees to
maintain the highest ethical and legal standards in their
conduct of International Paper business; a toll-free telephone
compliance line whereby any employee may report suspect-
ed violations of law or International Paper’s policy; and an
office of ethics and business practices. The internal controls
system further includes careful selection and training of
supervisory and management personnel, appropriate delega-
tion of authority and division of responsibility, dissemina-
tion of accounting and business policies throughout
International Paper, and an extensive program of internal
audits with management follow-up.

The independent public accountants provide an objec-
tive, independent review of management’s discharge of its
responsibility for the fairness of our financial statements.
They review our internal accounting controls and conduct
tests of procedures and accounting records to enable them to
form the opinion set forth in their report.

The Board of Directors monitors management’s adminis-
tration of International Paper’s financial and accounting poli-
cies and practices, and the preparation of these financial state-
ments. The Audit Committee, which consists of four nonem-
ployee directors, meets regularly with representatives of man-
agement, the independent public accountants and the Internal
Auditor to review their activities. The Audit Committee rec-
ommends that the shareholders approve the appointment of
the independent public accountants to conduct the audit.
The independent public accountants and the Internal
Auditor both have free access to the Audit Committee and
meet regularly with the Audit Committee, with and with-
out management representatives in attendance.

J O H N V. F A R A C I

S E N I O R V I C E P R E S I D E N T A N D C H I E F F I N A N C I A L O F F I C E R

R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S
To the Shareholders of International Paper Company:

We have audited the accompanying consolidated balance
sheets of International Paper Company (a New York corpora-
tion) and subsidiaries as of December 31, 1999 and 1998,
and the related statements of earnings, common sharehold-
ers’ equity and cash f lows for each of the three years ended
December 31, 1999. These financial statements are the
responsibility of International Paper’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the con-
solidated financial statements of Union Camp Corporation
(a company acquired during 1999 in a transaction accounted
for as a pooling-of-interests) prior to 1999. The Union
Camp financial statements ref lect total assets and total rev-
enues of 16% and 19% in each of 1998 and 1997, respec-
tively, of the related consolidated totals. Those statements
were audited by other auditors whose report has been fur-
nished to us and our opinion, insofar as it relates to the
amounts included for that entity, is based solely on the
report of the other auditors.

We conducted our audits in accordance with generally

accepted auditing standards in the United States. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the

other auditors, the financial statements referred to above
present fairly, in all material respects, the financial position
of International Paper Company and subsidiaries as of
December 31, 1999 and 1998, and the results of their oper-
ations and their cash flows for each of the three years ended
December 31, 1999 in conformity with generally accepted
accounting principles in the United States.

N E W Y O R K , N . Y.

F E B R U A R Y 8 , 2 0 0 0

I N T E R N A T I O N A L P A P E R

C O N S O L I D A T E D S T A T E M E N T O F E A R N I N G S

In millions, except per share amounts, for the years ended December 31
1997
__________________________________________________________________________________________________________________

1998

1999

$ 24,573
_______

$ 23,979
_______

$ 24,556
_______

18,105

2,083

1,520

1,098

226

(5)

255

298

18,087

2,090

1,570

1,165

255

(1)

660

17,924

2,032

1,494

1,087

231

145

111

30
_______

_______

150
_______

23,620

23,039

23,976

_______

20
_______

170
_______

989
541
_______

1,043
614
_______

750
607
_______

448

429

143

163
_______

87
_______

140
_______

199
16
_______

247

(80)

_______

$
183
_______
_______

$
247
_______
_______

$
(80)
_______
_______

0.48

0.60

(0.20)

(0.04)
_______

_______

$
0.44
_______
_______

$
0.60
_______
_______

$
(0.20)
_______
_______

$
0.60
_______
_______

$
(0.20)
_______
_______

N E T S A L E S

C O S T S A N D E X P E N S E S

Cost of products sold

Selling and administrative expenses

Depreciation and amortization

Distribution expenses

Taxes other than payroll and income taxes

Equity (earnings) losses from investment in Scitex

Merger integration costs

Restructuring and other charges

Environmental remediation charge

Oil and gas impairment charges
Provision for legal reserves

T O T A L C O S T S A N D E X P E N S E S

Reversals of reserves no longer required

Gains on sales of businesses

E A R N I N G S B E F O R E I N T E R E S T, I N C O M E T A X E S ,
M I N O R I T Y I N T E R E S T A N D E X T R A O R D I N A R Y I T E M

Interest expense, net

E A R N I N G S B E F O R E I N C O M E T A X E S ,
M I N O R I T Y I N T E R E S T A N D E X T R A O R D I N A R Y I T E M

Income tax provision

Minority interest expense, net of taxes

E A R N I N G S ( L O S S ) B E F O R E E X T R A O R D I N A R Y I T E M

Loss on extinguishment of debt, net of taxes

N E T E A R N I N G S ( L O S S )

E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E -
B E F O R E E X T R A O R D I N A R Y I T E M

E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E - E X T R A O R D I N A R Y I T E M

E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E

E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E - A S S U M I N G D I L U T I O N

The accompanying notes are an integral part of these financial statements.

I N T E R N A T I O N A L P A P E R

C O N S O L I D A T E D B A L A N C E S H E E T

In millions at December 31
1998
__________________________________________________________________________________________________________________

1999

A S S E T S

Current Assets

Cash and temporary investments

Accounts and notes receivable, less allowances of $106 in 1999 and $115 in 1998

Inventories

Other current assets

Total Current Assets

Plants, Properties and Equipment, Net

Forestlands

Investments

Goodwill

Deferred Charges and Other Assets

T O T A L A S S E T S

L I A B I L I T I E S A N D C O M M O N S H A R E H O L D E R S ’ E Q U I T Y

Current Liabilities

Notes payable and current maturities of long-term debt

Accounts payable

Accrued payroll and benefits

Other accrued liabilities

Total Current Liabilities

Long-Term Debt
Deferred Income Taxes

Other Liabilities

Minority Interest

International Paper - Obligated Mandatorily Redeemable Preferred Securities

of Subsidiaries Holding International Paper Debentures - Note 8

Commitments and Contingent Liabilities - Note 11

Common Shareholders’ Equity

Common stock, $1 par value, 1999 - 414.6 shares, 1998 - 413.2 shares

Paid-in capital

Retained earnings

Accumulated other comprehensive income (loss)

Less: Common stock held in treasury, at cost, 1999 - 1.2 shares, 1998 - 0.6 shares

Total Common Shareholders’ Equity

T O T A L L I A B I L I T I E S A N D C O M M O N S H A R E H O L D E R S ’ E Q U I T Y

The accompanying notes are an integral part of these financial statements.

453

3,227

3,203

358
_______

7,241
_______

14,381

2,921

1,044

2,596

2,085
_______

$ 30,268
_______
_______

920

1,870

423

1,169
_______

4,382
_______

7,520

3,344

1,332

1,581

1,805

415

4,078

6,613

(739)
_______

10,367

63
_______

10,304
_______

$ 30,268
_______
_______

533

3,018

3,211

399
_______

7,161
_______

15,320

3,093

1,147

2,699

2,046
_______

$ 31,466
_______
_______

$ 1,418

1,808

370

890
_______

4,486
_______

7,697

3,673

1,347

1,720

1,805

413

3,896

6,848

(395)
_______

10,762

24
_______

10,738
_______

$31,466
_______
_______

I N T E R N A T I O N A L P A P E R

C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
In millions for the years ended December 31
1997
__________________________________________________________________________________________________________________

1999

1998

O P E R A T I N G A C T I V I T I E S
Net earnings (loss)
Depreciation and amortization
Deferred income tax provision (benefit)
Payments related to restructuring and legal reserves
Payments related to the Union Camp merger
Merger integration costs
Restructuring and other charges
Environmental remediation charge
Provision for legal reserves
Oil and gas impairment charges
Reversals of reserves no longer required
Gains on sales of businesses
Loss on extinguishment of debt
Other, net
Changes in current assets and current liabilities

Accounts and notes receivable
Inventories
Accounts payable and accrued liabilities
Other

C A S H P R O V I D E D B Y O P E R A T I O N S

I N V E S T M E N T A C T I V I T I E S
Invested in capital projects
Mergers and acquisitions, net of cash acquired
Proceeds from divestitures
Other

C A S H U S E D F O R I N V E S T M E N T A C T I V I T I E S

F I N A N C I N G A C T I V I T I E S
Issuance of common stock
Issuance of preferred securities by subsidiary
Issuance of debt
Reduction of debt
Change in bank overdrafts
Dividends paid
Other

C A S H U S E D F O R F I N A N C I N G A C T I V I T I E S

E F F E C T O F E X C H A N G E R A T E C H A N G E S O N C A S H

183
1,520
(208)
(191)
(172)
255
298
10
30

(36)

26
45

247
1,494
132
(82)

(80)
1,570
(79)
(103)

145

111
(83)
(20)

660

150

(170)

126

(361)
(121)
449
1
_______

152
51
(113)
(16)
_______

(142)
(149)
(168)
8
_______

1,728
_______

2,098
_______

1,623
_______

(1,139)
(54)
119
(11)
_______

(1,322)
(498)
523
(51)
_______

(1,448)
(94)
322
37
_______

(1,085)
_______

(1,348)
_______

(1,183)
_______

246

1,023
(1,563)
102
(418)
(96)
_______

115
1,525
348
(2,213)
68
(431)
(63)
_______

164

719
(860)
29
(427)
(31)
_______

(706)
_______

(651)
_______

(406)
_______

(17)
_______

1
_______

2
_______

C H A N G E I N C A S H A N D T E M P O R A R Y I N V E S T M E N T S

(80)

100

C A S H A N D T E M P O R A R Y I N V E S T M E N T S

Beginning of the year

End of the year

The accompanying notes are an integral part of these financial statements.

533
_______
$
453
_______
_______

433
_______
$
533
_______
_______

397
_______
$
433
_______
_______

I N T E R N A T I O N A L P A P E R

C O N S O L I D A T E D S T A T E M E N T O F C O M M O N S H A R E H O L D E R S ’ E Q U I T Y
In millions, except share amounts in thousands
____________________________________________________________________________________________________________________

Total
Common
Shareholders’
Equity
___________________________________________________________________________________

Accumulated
Other
Comprehensive
Income (Loss)

_______________
Treasury Stock
Shares
Amount

______________
Common Stock Issued
Shares
Amount

Retained
Earnings

Paid-In
Capital

B A L A N C E , J A N U A R Y 1 , 1 9 9 7

406,041

$406

$3,607

$7,539

$(181)

554

$22

$11,349

Issuance of stock for merger
Issuance of stock for various plans
Repurchase of stock
Cash dividends - Common stock ($1.05 per share)
Comprehensive income (loss)

Net loss
Change in cumulative foreign currency

translation adjustment (less tax expense of $200)

Realized foreign currency translation

adjustment related to divestitures
(less tax benefit of $6)
Total comprehensive income (loss)

184
2,637
(688)

3
(1)

11
77
(36)

(2,345)
2,517

(106)
121

(427)

(80)

(257)

_______

_____

______

11
186
(158)
(427)

(80)

(257)

23
______
(314)
______

B A L A N C E , D E C E M B E R 3 1 , 1 9 9 7

408,174

408

3,659

7,032

(415)

726

10,647

Issuance of stock for merger
Issuance of stock for various plans
Repurchase of stock
Cash dividends - Common stock ($1.05 per share)
Comprehensive income (loss)

Net earnings
Minimum pension liability adjustment

(less tax benefit of $5)

Change in cumulative foreign currency

translation adjustment (less tax benefit of $2)
Realized foreign currency translation
adjustment related to divestitures
(less tax benefit of $4)
Total comprehensive income

B A L A N C E , D E C E M B E R 3 1 , 1 9 9 8

Issuance of stock for various plans
Repurchase of stock
Cash dividends - Common stock ($1.01 per share)
Comprehensive income (loss)

Net earnings
Minimum pension liability adjustment

(less tax expense of $1)

Change in cumulative foreign currency

translation adjustment (less tax expense of $31)

Total comprehensive income (loss)

4,683
605
(277)

5
1
(1)

227
23
(13)

(2,694)
2,520

(128)
115

(431)

247

(8)

_______

_____

______

232
152
(129)
(431)

247

(8)

7
______
267
______

3,896

6,848

(395)

552

10,738

413,185

1,399

413

182

(1,866)
2,530

(87)
126

(418)

183

(346)

271
(126)
(418)

183

(346)
______
(161)
______

_______

_____

______

B A L A N C E , D E C E M B E R 3 1 , 1 9 9 9

414,584
_______
_______

$415
_____
_____

$4,078
______
______

$6,613
______
______

$(739)
______
______

1,216
______
______

$63
______
______

$10,304
______
______

The cumulative foreign currency translation adjustment (in millions) was $(733), $(387) and $(415) at December 31, 1999, 1998 and 1997, respec-
tively, and is included as a component of accumulated other comprehensive income (loss).

The accompanying notes are an integral part of these financial statements.

N O T E S

T O

C O N S O L I D A T E D

F I N A N C I A L S T A T E M E N T S

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

N A T U R E O F O U R B U S I N E S S

International Paper is a global forest products, paper and
packaging company that is complemented by an extensive
distribution system, with primary markets and manufactur-
ing operations in the U.S., Europe and the Pacific Rim.
Substantially all of our businesses have experienced and are
likely to continue to experience cycles relating to available
industry capacity and general economic conditions. For a
further discussion of our business see pages 6 through 29 of
management’s discussion and analysis of financial condition
and results of operations.

F I N A N C I A L S T A T E M E N T S

The preparation of these financial statements in conformity
with generally accepted accounting principles requires the
use of management’s estimates. For a further discussion of
significant estimates and assumptions that affect the report-
ed amounts of assets and liabilities and results of operations,
and disclosure of contingent assets and liabilities, see the
legal and environmental issues section beginning on page
24. Actual results could differ from management's esti-
mates.

On April 30, 1999, International Paper completed the
merger with Union Camp Corporation (Union Camp) in a
transaction accounted for as a pooling-of-interests. The accom-
panying financial statements have been restated to include the
financial position and results of operations for both Union
Camp and International Paper for all periods presented.

R E V E N U E R E C O G N I T I O N

Revenues are recognized when goods are shipped.

C O N S O L I D A T I O N

The consolidated financial statements include the accounts
of International Paper Company and its subsidiaries.
Minority interest represents minority shareholders’ propor-
tionate share of the equity in several of our consolidated
subsidiaries, primarily Carter Holt Harvey Limited, Zanders
Feinpapiere AG, Bush Boake Allen, Inc., Georgetown
Equipment Leasing Associates, L.P. and Trout Creek
Equipment Leasing, L.P. All significant intercompany bal-
ances and transactions are eliminated. Investments in affili-
ated companies owned 20% to 50%, and our 13% invest-
ment in Scitex Corporation Ltd., where we had the ability
to exercise significant influence, because we were party to a
shareowners’ agreement with two other entities which

together with International Paper owned just over 39% of
Scitex, were accounted for by the equity method.
International Paper’s share of affiliates’ earnings is included
in the consolidated statement of earnings.

T E M P O R A R Y I N V E S T M E N T S

Temporary investments with an original maturity of three
months or less are treated as cash equivalents and are stated
at cost, which approximates market.

I N V E N T O R I E S

Inventory values include all costs directly associated with man-
ufacturing products: materials, labor and manufacturing over-
head. These values are presented at cost or market, if it is lower.
In the U.S., costs of raw materials and finished pulp and paper
products are generally determined using the last-in, first-out
method. Other inventories are primarily stated using the first-
in, first-out or average cost method.

P L A N T S , P R O P E R T I E S A N D E Q U I P M E N T

Plants, properties and equipment are stated at cost, less accu-
mulated depreciation. For financial reporting purposes, we
use the units-of-production method of depreciation for our
major pulp and paper mills and certain wood products facili-
ties and the straight-line method for other plants and equip-
ment. Annual straight-line depreciation rates are buildings,
2 1/2% to 8 1/2%, and machinery and equipment, 5% to
33%. For tax purposes, depreciation is computed using accel-
erated methods.

Interest costs related to the development of certain long-

term assets are capitalized and amortized over the related
assets’ estimated useful lives. We capitalized net interest
costs of $29 million in 1999, $53 million in 1998 and $72
million in 1997. Interest payments made during 1999, 1998
and 1997 were $594 million, $766 million and $836 mil-
lion, respectively. Total interest expense was $611 million in
1999, $706 million in 1998 and $710 million in 1997.

F O R E S T L A N D S

International Paper controlled, through domestic subsidiaries,
approximately 7.1 million acres of forestlands in the U.S. and,
through its ownership of Carter Holt Harvey, approximately
785,000 acres of forestlands in New Zealand at December 31,
1999. Forestlands are stated at cost, less accumulated deple-
tion representing the cost of timber harvested. The cost of
timber harvested is included in cost of products sold in the
consolidated statement of earnings. Forestlands include owned
property as well as certain timber harvesting rights with
terms of one or more years. Costs attributable to timber are

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

charged against income as trees are cut. The depletion rate
charged is determined annually based on the relationship of
remaining costs to estimated recoverable volume.

A M O R T I Z A T I O N O F I N T A N G I B L E A S S E T S

Goodwill, the cost in excess of assigned value of businesses
acquired, is amortized for periods of up to 40 years.
Accumulated amortization was $487 million and $441 mil-
lion at December 31, 1999 and 1998, respectively. Goodwill
amortization expense is included in depreciation and amorti-
zation in the consolidated statement of earnings.

S T O C K - B A S E D C O M P E N S A T I O N

Stock options and other stock-based compensation awards are
accounted for using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations.

E N V I R O N M E N T A L R E M E D I A T I O N C O S T S

Costs associated with environmental remediation obligations are
accrued when such costs are probable and reasonably estimable.
Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environ-
mental remediation obligations are discounted to their present
value when the expected cash flows are reliably determinable.

T R A N S L A T I O N O F F I N A N C I A L S T A T E M E N T S
Balance sheets of international operations are translated into
U.S. dollars at year-end exchange rates, while statements of
earnings are translated at average rates. Adjustments resulting
from financial statement translations are included as cumula-
tive translation adjustments in accumulated other comprehen-
sive income (loss). Gains and losses resulting from foreign cur-
rency transactions are included in earnings.

R E C L A S S I F I C A T I O N S

Certain reclassifications have been made to prior-year amounts
to conform with the current-year presentation.

NOTE 2 EARNINGS PER COMMON SHARE

Earnings per common share were computed by dividing net
earnings by the weighted average number of common shares
outstanding. Earnings per common share - assuming dilution
were computed assuming that all potentially dilutive securi-
ties were converted into common shares at the beginning of
each year. A reconciliation of the amounts included in the
computation of earnings per common share and earnings per
common share - assuming dilution is as follows:

In millions
________________________________
Net earnings (loss)
Effect of dilutive securities
Preferred securities of subsidiary trust ______
Net earnings (loss) - assuming dilution
$ 183
______
______

1999
______
$ 183

1998
_____
$ 247

1997
______
(80)
$

______
$ 247
______
______

______
$
(80)
______
______

Average common shares outstanding
Effect of dilutive securities
Long-term incentive plan
deferred compensation

Stock options
Preferred securities of subsidiary trust
Average common shares outstanding -

assuming dilution

413.0

411.0

406.7

3.1

3.2

______
416.1
______
______

______
414.2
______
______

______
406.7
______
______

Earnings (loss) per common share

$ 0.44
______
______

$ 0.60
______
______

$ (0.20)
______
______

Earnings (loss) per common share -

assuming dilution

$ 0.44
______
______

$ 0.60
______
______

$ (0.20)
______
______

Note: If an amount does not appear in the above table, the security was antidilutive for the
period presented.

NOTE 3 INDUSTRY SEGMENT INFORMATION

Financial information by industry segment and geographic area
for 1999, 1998 and 1997 is presented on pages 30 and 31. The
segment and geographic area information has been restated to
include Union Camp for all years presented.

NOTE 4 RECENT ACCOUNTING DEVELOPMENTS

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability mea-
sured by its fair value. The Statement requires that changes in
the derivative’s fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative’s gains and
losses to offset related results of the hedged item in the income
statement and requires that a company must formally docu-
ment, designate and assess the effectiveness of transactions that
receive hedge accounting.

The Statement is effective for fiscal years beginning after

June 15, 2000. A company may also implement the

N O T E S

T O

C O N S O L I D A T E D

F I N A N C I A L S T A T E M E N T S

Statement as of the beginning of any fiscal quarter after
issuance. The Statement cannot be applied retroactively. The
Statement must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid con-
tracts that were issued, acquired, or substantively modified
after December 31, 1997 (and at the company’s election,
before January 1, 1998).

We have not quantified the impact of adopting the

Statement on our consolidated financial statements nor have
we determined the timing of or method of the adoption.
However, we believe that adoption of the provisions of the
Statement could increase volatility in earnings and other
comprehensive income.

NOTE 5 MERGERS AND ACQUISITIONS

On November 24, 1998, International Paper announced
that it had reached an agreement to merge with Union
Camp Corporation, a diversified paper and forest products
company. The transaction was approved by Union Camp and
International Paper shareholders on April 30, 1999. Union
Camp shareholders received 1.4852 International Paper
common shares for each Union Camp share held. The total
value of the transaction, including the assumption of debt,
was approximately $7.9 billion.

We issued 110 million shares for 74 million Union Camp
shares, including options. The merger was accounted for as a
pooling-of-interests.

The accompanying financial statements have been restat-
ed to combine the historical financial position and results of
operations for both International Paper and Union Camp for
all periods presented. The results of operations for the sepa-
rate companies for the periods prior to the merger and the
combined amounts included in our consolidated financial
statements are as follows:

In millions
March 31, 1999 December 31, 1998 December 31, 1997
____________________________ _________ ___________ __________
Net sales:

Three Months
Ended

Twelve Months
Ended

International Paper
Union Camp
Intercompany eliminations

Net earnings (loss):

International Paper
Union Camp
Other

$ 4,962
1,137
(67)
_______
$ 6,032
_______
_______

44
(10)
(2)
_______
32
$
_______
_______

$ 19,541
4,503
(65)
_______
$ 23,979
_______
_______

236
19
(8)
_______
247
$
_______
_______

$ 20,096
4,477
(17)
_______
$ 24,556
_______
_______

(151)
81
(10)
_______
(80)
$
_______
_______

Note: Other includes the elimination of intercompany transactions and adjustments to
conform the accounting practices of the two companies.

In April 1999, Carter Holt Harvey acquired the corrugated

packaging business of Stone Australia, a subsidiary of
Smurfit-Stone Container Corporation. The business consists
of two sites in Melbourne and Sydney which serve industrial
and primary produce customers.

In December 1998, we completed the acquisition of
Svetogorsk AO, a Russia-based pulp and paper business,
which has enhanced International Paper's ability to serve
growing market demand in Eastern Europe. Also in
December 1998, Carter Holt Harvey and International
Paper jointly acquired Marinetti S.A.’s paper cup division
based in Chile. This acquisition has enabled the foodservice
business to better serve markets in South America.

In July 1998, International Paper acquired the Zellerbach

distribution business from the Mead Corporation for $261
million in cash. Zellerbach has been integrated into xpedx,
our distribution business.

In April 1998, Weston Paper and Manufacturing Company

(Weston) was acquired by exchanging 4.7 million
International Paper common shares valued at $232 million for
all of the outstanding Weston shares in a noncash transaction.
In April 1998, Carter Holt Harvey acquired Riverwood
International, an Australia-based folding carton business.

In March 1998, a wholly-owned subsidiary of

International Paper purchased all of the publicly traded
Class A depository units of IP Timberlands, Ltd. for a cash
purchase price of $100 million.

In February 1998, we entered into a joint venture with
Olmuksa in Turkey for the manufacture of containerboard
and corrugated boxes for markets in Turkey and surrounding
countries. Also in February 1998, Carter Holt Harvey and
International Paper jointly acquired Australia-based
Continental Cup.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Acquisitions in 1997 included: Taussig's Graphic Supply,
Inc., a distribution company; Phoenix Display and Packaging
Corporation, a merchandising and point-of-purchase display
company; Merbok Formtec, a pioneer in the development of
door facing products; Antietem Paper Company, a distribu-
tion company; and a 75% interest in Puntapel S.A., an
Argentinean multi-wall plant. The cost of these acquisitions,
net of cash acquired, was $94 million in the aggregate.

All of the acquisitions in 1999, 1998 and 1997, with the

exception of the Union Camp acquisition which was
accounted for as a pooling-of-interests, were accounted for
using the purchase method. The operating results of those
mergers and acquisitions accounted for under the purchase
method have been included in the consolidated statement of
earnings from the dates of acquisition.

NOTE 6 SPECIAL ITEMS INCLUDING RESTRUCTURING
AND BUSINESS IMPROVEMENT ACTIONS

After special items

Earnings
(Loss)
Before Income
Taxes and
Minority
Interest

1999
________________
Earnings
(Loss)
After Income
Taxes and
Minority
Interest
_______ _______
$ 551
(97)
(78)
(180)
(6)
(18)
27
______
______
$ 199
______

$1,005
(148)
(107)
(298)
(10)
(30)
36
______
______
$ 448
______

internal capacity and cost reduction actions, a $10 million
pre-tax charge ($6 million after taxes) to increase existing
environmental remediation reserves related to certain former
Union Camp facilities, a $30 million pre-tax charge ($18
million after taxes) to increase existing legal reserves and a
$36 million pre-tax credit ($27 million after taxes) for the
reversal of reserves that were no longer required.

The one-time merger expenses of $107 million consisted

The Union Camp merger-related termination benefits
charge relates to employees terminating after the effective
date of the merger under an integration benefits program.
Under this program, 1,218 employees of the combined com-
pany were identified for termination. Benefits payable under
this program for certain senior executives and managers are
or have been paid from the general assets of International
Paper. Benefits for remaining employees have been or will be
primarily paid from plan assets of our qualified pension plan.
Through December 31, 1999, 787 employees had been ter-
minated. Related cash payments approximated $65 million
(including payments related to our nonqualified pension
plans). The remaining charge primarily represents an increase
in the projected benefit obligation of our qualified pension
plan.

The following table is a roll forward of the Union Camp

merger-related termination benefit charge:

In millions
_______________________________
Special charge (1,218 employees)

Termination
Benefits
_________
148
$

Balance, December 31, 1999

Incurred costs (787 employees)

(116)
_________
32
$
_________
_________
Note: Benefit costs are treated as incurred on the termination date of the employee.

The $298 million charge for the asset shutdowns of excess

internal capacity consisted of a $113 million charge in the
1999 second quarter and a $185 million charge in the 1999
fourth quarter.

The second quarter 1999 $113 million charge for the asset
shutdowns of excess internal capacity and cost reduction actions

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

included $57 million of asset write-downs and $56 million of
severance and other charges. The following table and discussion
presents additional detail related to the $113 million charge:

In millions
____________________________

Printing and Communications

Papers

European Papers

Consumer Packaging

Industrial Packaging

Chemicals and Petroleum

Industrial Papers

Asset
Write-downs
Total
_________ ________ _____

Severance
and Other

(a)

(b)

(c)

(d)

(e)

(f)

$ 27

$ 33

7
_____

$ 57
_____
_____

7
_____

$ 56
_____
_____

14
_____

$ 113
_____
_____

(a) We recorded a charge of $24 million for severance relat-

(b) The charge for European Papers, which covers the shut-
down of two mills, consists of $3 million in asset write-
downs, $6 million in severance costs and $1 million of
other exit costs. The Lana mill in Docelles, France was
shut down due to excess capacity. The Lana mill produced
approximately 5,000 metric tons of high-end uncoated
specialty paper per year. This production was shifted to the
La Robertsau mill in Strasbourg, France. The Lana mill
fixed assets were written down $3 million to their estimat-
ed fair value of zero. Costs related to the site closure are
expected to be $1 million and severance related to the ter-

mination of 42 employees will be approximately $4 mil-
lion. The Lana mill had revenues of $12 million and an
operating loss of $2 million for the year ended December
31, 1999. At December 31, 1999, 14 employees had been
terminated.

The Corimex coating plant in Clermont-Ferrand,
France was shut down in April 1999. The market for
thermal fax paper, which was produced at the plant, has
been shrinking since the mid-1990’s. The assets at this
plant were considered to be impaired in 1997 and were
written down accordingly at that time. A $2 million sev-
erance charge was recorded during the second quarter of
1999 to cover the costs of terminating 81 employees.
Corimex had revenues of $6 million and an operating
loss of $3 million for the year ended December 31,
1999. At December 31, 1999, all 81 employees had been
terminated.

(d) As a result of the merger with Union Camp, we negotiated
the resolution of contractual commitments in an industrial
packaging investment in Turkey. As a result of these nego-
tiations and evaluation of this entity, it was determined
that the investment was impaired. A $12 million charge
was recorded to reflect this impairment and the related
costs of resolving the contractual commitments.

(e) As a result of an overall reduction in market demand for

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

dissolving pulp, the decision was made to downsize the
Natchez, Mississippi mill. Charges associated with
capacity reduction total $10 million and include the
shutdown of several pieces of equipment. A severance
charge of $3 million includes the elimination of 89 posi-
tions. At December 31, 1999, 88 employees had been
terminated.

In millions
____________________________

Printing and Communications

Papers

Consumer Packaging

Industrial Packaging

Chemicals and Petroleum

Building Materials

Distribution

Carter Holt Harvey

Asset
Write-downs
Total
_________ ________ _____

Severance
and Other

(a)

(b)

(c)

(d)

(e)

(f)

(g)

$ 12

18
_____

$ 92
_____
_____

9
_____

$ 93
_____
_____

27
_____

$ 185
_____
_____

that the Erie, Pennsylvania mill would change from a
seven day, four crew schedule to a three crew schedule in
order to balance operating capacity with sales demand.
This production curtailment resulted in a severance
charge of $2 million for the termination of 99 employees.
The charge for the deferred software write-off was $3 mil-
lion. International Paper also wrote down its investment
in the Otis Hydroelectric partnership by $7 million to the
approximate market value of the investment based upon
our current offer to acquire the other partner’s interest.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

a fully integrated site comprised of a crude tall oil frac-
tionation plant, a rosin resin upgrading plant and a
dimer plant. The crude tall oil and rosin resin upgrading
facilities at the site will be closed and production shifted
to other Arizona Chemical facilities. Asset write-downs
for this plant total $30 million. A severance charge of $3
million covers the termination of 83 employees. Other
costs of $12 million include demolition and contract can-
cellations. We also recorded an additional charge of $5
million related to the 1998 closure of the Springhill
plant, covering other exit costs including demolition and
cleanup.

(g) This charge is related to the shutdown of the No. 5

provide adequate returns on the capital required and that
it would be scrapped. Accordingly, the machine was
written down from its $20 million book value to its esti-
mated salvage value of $2 million. Also, severance costs
total $9 million and cover the costs of terminating 300
employees.

The $30 million pre-tax charge to increase existing legal
reserves includes $25 million which we added to our reserve
for hardboard siding claims. A further discussion of this
charge can be found in Note 11. Commitments and
Contingent Liabilities. The remaining $5 million is related to
other potential exposures.

The $36 million pre-tax credit for reserves no longer

The following table is a roll forward of the severance and other

costs included in the 1999 restructuring plans (in millions):

Opening Balance (second quarter 1999)

Additions (fourth quarter 1999)

1999 Activity

Cash charges

Balance, December 31, 1999

Severance
and Other
________

(34)
________

$ 115
________
________

The severance reserves recorded in the 1999 second and
fourth quarters related to 3,163 employees. As of December
31, 1999, 760 employees had been terminated.

Earnings
(Loss)
Before Income
Taxes and
Minority
Interest

1998
________________
Earnings
(Loss)
AfterIncome
Taxes and
Minority
Interest
_______ _______
$ 345
$ 598
(68)
(111)
(92)
(161)
12
20
50
83
_______
$ 247
_______
_______

_______
$ 429
_______
_______

In millions
____________________________
Before special items
Oil and gas impairment charges
Restructuring and other charges
Gain on sale of business
Reversals of reserves no longer required

After special items

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

During 1998, we recorded $111 million of oil and gas

(a) After the acquisition of Zellerbach, management of

impairment charges ($68 million after taxes). Of this amount,
$56 million ($35 million after taxes) was recorded in the
fourth quarter and $55 million ($33 million after taxes) was
recorded in the third quarter. International Paper has oil and
gas exploration and production operations in West Texas, the
Gulf Coast and the Gulf of Mexico. The Securities and
Exchange Commission’s regulations for companies that use
the full-cost method of accounting for oil and gas activities
require companies to perform a ceiling test on a quarterly
basis. As a result of low oil and gas prices, the value of our
properties was written down through these noncash charges.
Also in 1998, we recorded a $145 million pre-tax restruc-
turing charge ($82 million after taxes and minority interest
expense) consisting of $64 million of asset write-downs and
$81 million of severance costs and we recorded pre-tax
charges of $16 million ($10 million after taxes) related to our
share of write-offs taken by Scitex, a 13% investee company,
related to in-process research and development of an acquisi-
tion and its exit from the digital video business. The Scitex
items are reflected as equity losses from the investment in
Scitex in the consolidated statement of earnings. In addition,
we recorded a $20 million pre-tax gain ($12 million after
taxes) on the sale of our Veratec nonwovens division, and an
$83 million pre-tax gain ($50 million after taxes) from the
reversal of previously established reserves that were no longer
required. These reserves were established in 1996 and 1997
and were primarily associated with the Veratec and Imaging
businesses. The sales of these businesses were completed in
1998 and those reserves not required were returned to earn-
ings.

The following table and discussion presents additional detail

related to the $145 million restructuring charge:

In millions
____________________________

Asset
Write-downs
Total
_________ ________ _____

Severance

Distribution

(a)

$ 20

$ 10

$ 30

Printing and Communications

Papers

Carter Holt Harvey

Industrial Packaging

Union Camp

Other

Total

(b)

(c)

(d)

(e)

(f)

_____

$ 64
_____
_____

15
_____

$ 81
_____
_____

15
_____

$ 145
_____
_____

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

connection with the third-quarter decision to close this
mill, 298 employees at the mill were terminated and a
$7 million severance charge was recorded. This mill had
revenues of $78 million and $105 million and operating
losses of $16 million and $1 million in 1998 and 1997,
respectively.

(e) During 1998 Union Camp recorded a pre-tax special

The asset write-downs were principally attributable to

(f) The $15 million severance charge was recorded as a

The following table is a roll forward of the severance costs

included in the 1998 restructuring plan (in millions):

Opening Balance (third quarter 1998)
1998 Activity
Cash charges
1999 Activity
Cash charges
Reserve reversal

Balance, December 31, 1999

Severance
________
$ 81

(19)

(56)
(6)
________
$ 0
________
________

The severance reserve recorded in the 1998 third quarter

related to 2,508 employees. As of December 31, 1999, all
employees had been terminated.

In millions
____________________________
Before special items
Provision for legal reserve
Restructuring and other charges
Gain on sale of business

After special items

1997
________________

Earnings
(Loss)
Before Income
Taxes and
Minority
Interest
_______
$ 783
(150)
(660)
170
______
$
143
______
______

Earnings
(Loss)
After Income
Taxes and
Minority
Interest
_______
$ 381
(93)
(465)
97
______
$ (80)
______
______

Shutdown of European Papers facilities
Shutdown of U.S. Papers and Fine Papers facilities
Write-off of Haig Point real estate development
Other shutdowns

(a)
(b)
(c)

105
101
13
11
_______
$
230
_______
_______

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

(b) The $101 million reserve related to the restructuring of

The $210 million for the estimated losses on sales of busi-

nesses related to the following (in millions):

Imaging
Veratec
Decorative Products
Label

(a)
(b)
(c)
(d)

150
25
20
15
_______
$
210
_______
_______

(d) In the second quarter of 1997, management committed to
a plan to sell the label business. The estimated total loss
on the label business sale included in the second-quarter
1997 restructuring charge was $15 million. The label

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

business was sold in May of 1998. The label business had
revenues of $24 million and an operating loss of $2 mil-
lion in 1997.

permanently shut down this operation in the 1997 sec-
ond quarter. Accordingly, we wrote the license down to
zero.

The $95 million of severance and other expenses consists

(e) The charge of $22 million relates to other exit costs.

of the following (in millions):

Severance
Write-off of deferred software costs
Lease buyouts at warehouses
Write-off of deinking process license
Other exit costs

(a)
(b)
(c)
(d)
(e)

$ 42
18
9
4
22
_____
$ 95
_____
_____

obligations under existing warehouse leases. A decision to
close these warehouses was made in the second quarter of
1997.

(d) The $4 million charge represents the write-off of the net
carrying value of the deinking process license that had
been acquired from a third party. International Paper

Also included in the 1997 special items was a $150 mil-

Opening Balance (second quarter 1997)
1997 Activity

Asset write-downs
Cash charges

Balance, December 31, 1997
1998 Activity

Asset write-downs
Reserve reversals
Cash charges

Balance, December 31, 1998
1999 Activity
Cash charges

Balance, December 31, 1999

Severance
and
Other
________
95
$

(18)
(15)
________
62

(4)
(9)
(40)
________
9

(9)
0

________
$
________
________

NOTE 7 GAINS ON SALES OF WEST COAST PARTNERSHIP INTERESTS

On March 29, 1996, IP Timberlands, Ltd. (IPT) completed
the sale of a 98% general partnership interest in a sub-
sidiary partnership that owned approximately 300,000 acres
of forestlands located in Oregon and Washington. Included
in the net assets of the partnership interest sold were forest-
lands, roads and $750 million of long-term debt. As a result

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

noted above were $134 million, $54 million and $24 mil-
lion in 1999, 1998 and 1997, respectively.

NOTE 9 SALE OF LIMITED PARTNERSHIP INTERESTS

During 1993, International Paper contributed assets with a
fair market value of approximately $900 million to two
newly formed limited partnerships, Georgetown Equipment
Leasing Associates, L.P. and Trout Creek Equipment
Leasing, L.P. These partnerships are separate and distinct
legal entities from International Paper and have separate
assets, liabilities, business functions and operations.
However, for accounting purposes, we continue to consoli-
date these assets, and the minority shareholders’ interests are
reflected as minority interest in the accompanying financial
statements. The purpose of the partnerships is to invest in
and manage a portfolio of assets including pulp and paper
equipment used at the Georgetown, South Carolina and
Ticonderoga, New York mills. This equipment is leased to
International Paper under long-term leases. Partnership
assets also include floating rate notes and cash. During
1993, outside investors purchased a portion of our limited
partner interests for $132 million and also contributed an
additional $33 million to one of these partnerships.

At December 31, 1999, we held aggregate general and

limited partner interests totaling 58% in Georgetown
Equipment Leasing Associates, L.P. and 50% in Trout Creek
Equipment Leasing, L.P.

of this transaction, International Paper recognized in its
1996 first-quarter consolidated results a $592 million pre-
tax gain ($336 million after taxes and minority interest
expense). IPT and International Paper retained nonoperating
interests in the partnership. In December 1997, these
retained interests were redeemed and a related debt guaran-
ty was released resulting in a pre-tax gain of $170 million
($97 million after taxes and minority interest expense).
These gains were presented in the consolidated statement of
earnings as gains on sales of businesses.

NOTE 8 PREFERRED SECURITIES OF SUBSIDIARIES

In March 1998, Timberlands Capital Corp. II, Inc., a whol-
ly-owned consolidated subsidiary of International Paper,
issued $170 million of 7.005% preferred securities as part of
the financing to repurchase the outstanding units of IP
Timberlands, Ltd. These securities are not mandatorily
redeemable and are classified in the consolidated balance
sheet as a minority interest liability.

In June 1998, IP Finance (Barbados) Limited, a non-U.S.

wholly-owned consolidated subsidiary of International
Paper, issued $550 million of preferred securities with a
dividend payment based on LIBOR. These preferred securi-
ties are mandatorily redeemable on June 30, 2008.

In September 1998, International Paper Capital Trust III

issued $805 million of International Paper - obligated
mandatorily redeemable preferred securities. International
Paper Capital Trust III is a wholly-owned consolidated sub-
sidiary of International Paper and its sole assets are
International Paper 7 7/8% debentures. The obligations of
International Paper Capital Trust III related to its preferred
securities are fully and unconditionally guaranteed by
International Paper. These preferred securities are mandato-
rily redeemable on December 1, 2038.

In the third quarter of 1995, International Paper Capital
Trust (the Trust) issued $450 million of International Paper
- obligated mandatorily redeemable preferred securities. The
Trust is a wholly-owned consolidated subsidiary of
International Paper and its sole assets are International Paper
5 1/4% convertible subordinated debentures. The obliga-
tions of the Trust related to its preferred securities are fully
and unconditionally guaranteed by International Paper.
These preferred securities are convertible into International
Paper common stock.

Distributions paid under all of the preferred securities

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

NOTE 10 INCOME TAXES

We use the asset and liability method of accounting for income
taxes whereby deferred income taxes are recorded for the future
tax consequences attributable to differences between the finan-
cial statement and tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using tax rates expected
to apply to taxable income in the years in which those tempo-
rary differences are expected to be recovered or settled.
Deferred tax assets and liabilities are revalued to reflect new
tax rates in the periods rate changes are enacted.

The components of earnings before income taxes and

minority interest by taxing jurisdiction were:

In millions
_____________________________
Earnings
U.S.
Non-U.S.

1999
______

1998
______

1997
______

$ 237
211
______

$ 297
132
______

$
43
100
______

Earnings before income taxes, minority

interest and extraordinary item

$ 448
______
______

$ 429
______
______

$ 143
______
______

The provision for income taxes by taxing jurisdiction was:

In millions
_____________________________
Current tax provision (benefit)

U.S. federal
U.S. state and local
Non-U.S.

Deferred tax provision (benefit)

U.S. federal
U.S. state and local
Non-U.S.

1999
______

1998
______

1997
______

$ 259
27
8
______
294
______

(108)
(103)
3
______
(208)
______

$ (64)
(6)
33
______
(37)
______

117
(12)
27
______
132
______

$ 104
11
47
______
162
______

(41)
(41)
3
______
(79)
______

Income tax provision

$
86
______
______

$
95
______
______

$
83
______
______

We made income tax payments, net of refunds, of $68
million, $144 million and $209 million in 1999, 1998 and
1997, respectively.

A reconciliation of income tax expense using the statutory

U.S. income tax rate compared with actual income tax
expense follows:

In millions
_____________________________
Earnings before income taxes, minority
interest and extraordinary item
Statutory U.S. income tax rate
Tax expense using statutory
U.S. income tax rate
State and local income taxes
Non-U.S. tax rate differences
Permanent benefits on sales of
non-U.S. businesses
Permanent benefits on sales of

1999
______

$ 448
______

35%

1998
______

1997
______

$ 429
______

35%

$ 143
______

35%

157
(20)
(52)

150
(11)
20

(2)

(33)

50
(20)
32

non-strategic timberland assets
Nondeductible business expenses
Foreign sales corporation benefit
Minority interest
Goodwill
Net U.S. tax on non-U.S. dividends
Tax credits
Other, net
Income tax provision
Effective income tax rate

30
(9)
(56)
21
15
(12)
14
______
86
$
______
19%
______
______

(29)
9
(9)
(31)
21
10
(1)
(1)
______
95
$
______
22%
______
______

53
(22)
(23)
20
11
(7)
(11)
______
83
$
______
58%
______
______

The net deferred income tax liability as of December 31,

1999 and 1998 includes the following components:

In millions
_______________________________
Current deferred tax asset
Noncurrent deferred tax asset
Noncurrent deferred tax liability
Total

1999
________
196
$
240
(3,344)
________
$ (2,908)
________
________

1998
________
211
$
284
(3,673)
________
$ (3,178)
________
________

The tax effects of significant temporary differences repre-

senting deferred tax assets and liabilities at December 31,
1999 and 1998 were as follows:

In millions
_______________________________
Plants, properties and equipment
Prepaid pension costs
Forestlands
Postretirement benefit accruals
Alternative minimum and other tax credits
Net operating loss carryforwards
Other
Total

1999
________
$ (2,995)
(339)
(534)
225
390
235
110
________
$ (2,908)
________
________

1998
________
(3,036)
$
(347)
(638)
210
376
135
122
________
$ (3,178)
________
________

Net operating loss carryforwards, most of which are
applicable to non-U.S. subsidiaries, expire as follows: years

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

installed from January 1, 1980 to January 6, 1999.

Our reserves for these matters total $76 million at
December 31, 1999. The amount includes $25 million
which we added to our reserve for hardboard siding claims
in the fourth quarter of 1999, to cover an expected shortfall
in that reserve resulting primarily from a higher number of
hardboard siding claims in the fourth quarter of 1999 than
we had anticipated. It is reasonably possible that the higher
number of hardboard siding claims might be indicative of
the need for one or more future additions to this reserve.
However, whether or not any future additions to this reserve
become necessary, International Paper believes that these
settlements will not have a material adverse effect on our
consolidated financial position or results of operations. The
reserve balance is net of $51 million of expected insurance
recoveries (apart from the insurance recoveries to date).
Through December 31, 1999, settlement payments of $183
million, including the $51 million of nonrefundable
advances of attorney’s fees discussed above, have been made.
Also, we have received $27 million from our insurance carri-
ers through December 31, 1999. International Paper and
Masonite have the right to terminate each of the settlements
after seven years from the dates of final approval.

We are also involved in various other inquiries, adminis-
trative proceedings and litigation relating to contracts, sales
of property, environmental protection, tax, antitrust and
other matters, some of which allege substantial monetary
damages. While any proceeding or litigation has the ele-
ment of uncertainty, we believe that the outcome of any
lawsuit or claim that is pending or threatened, or all of
them combined, will not have a material adverse effect on
our consolidated financial position or results of operations.

2001 through 2006 - $139 million, year 2019 - $37 million
and indefinite carryforward - $564 million.

Deferred taxes are not provided for temporary differences of
approximately $570 million, $475 million and $555 million
as of December 31, 1999, 1998 and 1997, respectively, repre-
senting earnings of non-U.S. subsidiaries that are intended to
be permanently reinvested. If these earnings were remitted,
we believe that U.S. foreign tax credits would eliminate any
significant impact on future income tax provisions.

NOTE 11 COMMITMENTS AND CONTINGENT LIABILITIES

Certain property, machinery and equipment are leased under
cancelable and noncancelable agreements. At December 31,
1999, total future minimum rental commitments under non-
cancelable leases were $606 million, due as follows: 2000 -
$150 million, 2001 - $121 million, 2002 - $91 million,
2003 - $77 million, 2004 - $62 million and thereafter -
$105 million. Rent expense was $229 million, $237 million
and $242 million for 1999, 1998 and 1997, respectively.
Three nationwide class action lawsuits filed against

International Paper have been settled. The first suit alleged
that hardboard siding manufactured by Masonite fails pre-
maturely, allowing moisture intrusion that in turn causes
damage to the structure underneath the siding. The class
consisted of all U.S. property owners having Masonite hard-
board siding installed on and incorporated into buildings
between 1980 and January 15, 1998. Final approval of the
settlement was granted by the Court on January 15, 1998.
The settlement provides for monetary compensation to class
members meeting the settlement requirements on a claims-
made basis. It also provides for the payment of attorneys’
fees equaling 15% of the settlement amounts paid to class
members, with a nonrefundable advance of $47.5 million
plus $2.5 million in costs.

The second suit made similar allegations with regard to

Omniwood siding manufactured by Masonite (the
"Omniwood Lawsuit"). The class consists of all U.S. property
owners having Omniwood siding installed on and incorpo-
rated into buildings from January 1, 1992 to January 6,
1999.

The third suit alleged that Woodruf roofing manufac-
tured by Masonite is defective and causes damage to the
structure underneath the roofing (the "Woodruf Lawsuit").
The class consists of all U.S. property owners on which
Masonite Woodruf roofing has been incorporated and

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

NOTE 12 SUPPLEMENTARY BALANCE SHEET INFORMATION

NOTE 13 DEBT AND LINES OF CREDIT

Inventories by major category were:

A summary of long-term debt follows:

In millions at December 31
______________________________
Raw materials
Finished pulp, paper and packaging products
Finished lumber and panel products
Operating supplies
Other
Inventories

1999
_______
484
$
1,869
178
486
186
_______
$ 3,203
_______
_______

1998
______
$ 555
1,800
183
510
163
______
$ 3,211
______
______

The last-in, first-out inventory method is used to value

most of our domestic inventories. Approximately 73% of
total raw materials and finished products inventories were val-
ued using this method. If the first-in, first-out method had
been used, it would have increased total inventory balances by
approximately $250 million, $321 million and $348 million
at December 31, 1999, 1998 and 1997, respectively.

Plants, properties and equipment by major classification were:

In millions at December 31
______________________________
Pulp, paper and packaging facilities

Mills
Packaging plants

Wood products facilities
Other plants, properties and equipment
Gross cost
Less: Accumulated depreciation
Plants, properties and equipment, net

1999
_______

1998
______

$ 21,288
3,233
2,117
2,889
_______
29,527
15,146
_______
$14,381
_______
_______

$ 21,367
3,082
2,134
2,987
______
29,570
14,250
______
$ 15,320
______
______

In millions at December 31
______________________________
8 7/8% to 10.5% notes - due 2000 - 2012
8 7/8% to 9.7% notes - due 2000 - 2004
8 5/8% to 10% sinking fund debentures -

due 2000 - 2021

8.5% to 9.5% debentures - due 2002 - 2022
8 3/8% to 9 1/2% debentures – due 2015 - 2024
6 7/8% to 7 7/8% notes - due 2000 - 2007
6 7/8% to 8 1/8% notes - due 2023 – 2029
6.5% notes - due 2007
6 1/8% notes - due 2003
5 7/8% Swiss franc debentures - due 2001
5 3/8% note due - 2006
5 1/8% debentures - due 2012
Floating rate notes - due 1999 (1)
Medium-term notes - due 2000 - 2009 (2)
Environmental and industrial development

bonds - due 2000 - 2028 (3,4)

Commercial paper and bank notes (5)
Other (6)

Total (7)
Less: Current maturities

Long-term debt

1999
________
$ 563
600

1998
_________
$ 596
600

34
246
300
1,373
741
148
200
68
249
88

331

1,352
1,325
416
_____
8,034
514
_____
$7,520
_____
_____

243
325
300
1,423
546
148
200
82

86
450
625

1,363
1,196
459
_____
8,642
945
_____
$7,697
_____
_____

(1) The weighted average interest rate on these notes was 6.2% in 1998 and was based

on LIBOR.

(2) The weighted average interest rate on these notes was 8.3% in 1999 and 7.5% in

1998.

(3) The weighted average interest rate on these bonds was 6.1% in 1999 and 5.8% in

1998.

(4) Includes $149 million of bonds at December 31, 1999 and $274 million at

December 31, 1998, which may be tendered at various dates and/or under certain
circumstances.

(5) Includes $708 million in 1999 of non-U.S. dollar denominated borrowings with a

weighted average interest rate of 5.6% in 1999.

(6) Includes $14 million in 1999 and $36 million in 1998 of French franc borrowings
with a weighted average interest rate of 2.8% in 1999 and 2.7% in 1998, and
$132 million in 1999 and $159 million in 1998 of German mark borrowings with
a weighted average interest rate of 4.7% in 1999 and 4.6% in 1998.

(7) The fair market value was approximately $8.1 billion and $9.0 billion at December

31, 1999 and 1998, respectively.

Total maturities of long-term debt over the next five years
are 2000 - $514 million, 2001 - $619 million, 2002 - $1.4
billion, 2003 - $300 million and 2004 - $1.5 billion.

At December 31, 1999 and 1998, International Paper,
including a non-U.S. subsidiary, classified $1.5 billion and $1.4
billion, respectively, of tenderable bonds, commercial paper
and bank notes as long-term debt. International Paper and this
subsidiary have the intent and ability to renew or convert these
obligations through 2000 and into future periods.

At December 31, 1999, unused bank lines of credit
amounted to $1.9 billion. The lines generally provide for
interest at market rates plus a margin based on our current

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

bond rating. The principal line, which is cancelable only if
our bond rating drops below investment grade, provides for
$750 million of credit through March 2004, and has a facil-
ity fee of .10% that is payable quarterly. A 364-day facility
provides for $500 million of credit through March 29, 2000
and has a facility fee of .07% that is payable quarterly.
Carter Holt Harvey also has two principal lines of credit
that support its commercial paper programs. A $600 mil-
lion line of credit matures in April 2002 and has a .15%
facility fee that is payable quarterly and a 250 million New
Zealand dollar line of credit matures in February 2002 and
has a .13% facility fee that is payable quarterly.

At December 31, 1999, notes payable included $693 mil-
lion of non-U.S. dollar denominated debt with maturities of
less than twelve months and a weighted average interest rate
of 10.3%.

At December 31, 1999, outstanding debt included approx-

imately $1.7 billion of borrowings with interest rates that
fluctuate based on market conditions and our credit rating.
In 1999, International Paper recorded an extraordinary
loss of $16 million after taxes for the extinguishment of
high interest debt which was assumed under the merger
agreement with Union Camp. We extinguished approxi-
mately $275 million of long-term debt with interest rates
ranging from 8.5% to 10%.

Through a public tender offer in the 1997 third quarter,
International Paper’s then wholly-owned subsidiary, Federal
Paper Board, repurchased $164 million of its 10% deben-
tures due April 15, 2011. The earnings impact of the debt
retirement was not significant.

NOTE 14 FINANCIAL INSTRUMENTS

Financial instruments are used primarily to hedge exposure
to currency and interest rate risk. To qualify as hedges,
financial instruments must reduce the currency or interest
rate risk associated with the related underlying items and be
designated as hedges by management. Gains or losses from
the revaluation of financial instruments that do not qualify
for hedge accounting treatment are recognized in earnings.
Our policy is to finance a portion of our investments in
non-U.S. operations with borrowings denominated in the
same currency as the investment or by entering into foreign
exchange contracts in tandem with U.S. dollar borrowings.
These contracts are effective in providing a hedge against
fluctuations in currency exchange rates. Gains or losses from

the revaluation of these contracts, which are fully offset by
gains or losses from the revaluation of the net assets being
hedged, are determined monthly based on published curren-
cy exchange rates and are recorded as translation adjust-
ments in common shareholders’ equity. Upon liquidation of
the net assets being hedged or early termination of the for-
eign exchange contracts, the gains or losses from the revalua-
tion of foreign exchange contracts would be included in
earnings. Amounts payable to or due from the counterpar-
ties to the foreign exchange contracts are included in
accrued liabilities or accounts receivable as applicable.

Financial instruments outstanding at December 31, 1999

used to hedge net investments in non-U.S. operations con-
sisted of non-U.S. dollar denominated debt totaling $1.7
billion. Also outstanding were foreign currency forward con-
tracts totaling $1.5 billion, substantially all having maturi-
ties of less than twelve months, as noted in the following
table expressed in U.S. dollar equivalents. The average
amount of outstanding contracts during 1999 and 1998 was
$1.0 billion and $1.4 billion, respectively.

Foreign Currency
Forward Contracts (dollars in millions)
_____________________________
Receive Australian dollars / Pay New

Zealand dollars

Receive European euros / Pay U.S. dollars
Receive British pounds / Pay U.S. dollars
Receive New Zealand dollars / Pay U.S. dollars
Receive Swedish kronas / Pay U.S. dollars
Receive U.S. dollars / Pay New Zealand dollars

Weighted
Average Unrealized

Net

Contract Exchange
Rate
Amount
_______ _______ ________

Gain
(Loss)

20
1,012
99
332
34
25

0.79
0.95
0.62
1.93
8.09
0.56

(1)
52

3
2
3

Foreign exchange contracts are also used to hedge certain

transactions that are denominated in non-U.S. currencies,
primarily export sales and equipment purchased from non-
resident vendors. These contracts serve to protect
International Paper from currency f luctuations between the
transaction and settlement dates. Gains and losses from the
revaluation of these contracts, based on published currency
exchange rates, along with offsetting gains and losses result-
ing from the revaluation of the underlying transactions, are
recognized in earnings or deferred and recognized in the
basis of the underlying transaction when completed. Any
gains or losses arising from the cancellation of the underly-
ing transactions or early termination of the foreign currency
exchange contracts would be included in earnings.

Financial instruments outstanding at December 31, 1999
used to hedge transactions denominated in non-U.S. curren-

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Interest Rate and Currency Swaps (in millions)

Outstanding as
of December 31, 1999
________________
U.S. dollar variable to
fixed rate swaps
Average pay rate 7.3%
Average receive rate 6.1%
Australian dollar variable to
fixed rate swaps
Average pay rate 6.0%
Average receive rate 5.4%
New Zealand dollar variable to
fixed rate swaps
Average pay rate 6.8%
Average receive rate 5.4%

U.S. dollar fixed to
variable rate swaps
Average pay rate 7.4%
Average receive rate 6.6%
U.S. dollar to Australian dollar
cross-currency swap
Swiss franc to New Zealand
dollar cross-currency swaps

2000
___

2001
___

2002
___

$45

2003
___

$200

2004
___

$300

There-
after
___

Fair
Value
___

Total
___

$500

$1,045

$16

$48

176

140

200

550

500

1,295

(25)

150

(4)

(8)

We do not hold or issue financial instruments for trading

purposes. The counterparties to interest rate swap agree-
ments and foreign exchange contracts consist of a number of
major international financial institutions. International
Paper continually monitors its positions with and the credit
quality of these financial institutions and does not expect
nonperformance by the counterparties.

NOTE 15 CAPITAL STOCK

The authorized capital stock at December 31, 1999 and
1998 consisted of 990,850,000 and 400,000,000 shares of
common stock, $1 par value, respectively; 400,000 shares of
cumulative $4 nonredeemable preferred stock, without par
value (stated value $100 per share); and 8,750,000 shares of
serial preferred stock, $1 par value. The serial preferred
stock is issuable in one or more series by the Board of
Directors without further shareholder action.

cies consisted of foreign currency forward contracts totaling
$617 million, a majority having maturities of less than
twelve months, as noted in the following table expressed in
U.S. dollar equivalents. The average amount of outstanding
contracts during 1999 and 1998 was $454 million and
$610 million, respectively.

Weighted
Average Unrealized

Net

Foreign Currency
Contract Exchange
Forward Contracts (U.S. dollars in millions) Amount
_______________________________ _______ _______
Receive German marks / Pay British pounds
Receive European euros / Pay U.S. dollars
Receive European euros / Pay British pounds
Receive British pounds / Pay European euros
Receive New Zealand dollars / Pay Australian

3.00
0.99
1.58
0.63

40
51
65
21

Rate

dollars

Receive New Zealand dollars / Pay U.S. dollars
Receive U.S. dollars / Pay European euros
Receive U.S. dollars / Pay British pounds

116
167
56
20

1.23
1.96
1.07
1.61

Gain
(Loss)
_______
$

(3)

(1)

(5)
7

Note: We have an additional $81 million in a number of smaller contracts to purchase
or sell other currencies with a related net immaterial unrealized loss.

Cross-currency and interest rate swap agreements are used
to manage the composition of our fixed and floating rate debt
portfolio. Amounts to be paid or received as interest under
these agreements are recognized over the life of the swap
agreements as adjustments to interest expense. Gains or losses
from the revaluation of cross-currency swap agreements that
qualify as hedges of investments are recorded as translation
adjustments in common shareholders’ equity. Gains or losses
from the revaluation of cross-currency swap agreements that
do not qualify as hedges of investments are included in earn-
ings. The related amounts payable to or due from the coun-
terparties to the agreements are included in accrued liabilities
or accounts receivable as applicable. If swap agreements are
terminated early, the resulting gain or loss would be deferred
and amortized over the remaining life of the related debt.
The following table presents notional amounts and principal
cash flows for currency and interest rate swap agreements by
year of maturity expressed in U.S. dollar equivalents. The
impact on our earnings and net liability under these agree-
ments was not significant.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

NOTE 16 RETIREMENT PLANS

International Paper maintains pension plans that provide
retirement benefits to substantially all employees.
Employees generally are eligible to participate in the plans
upon completion of one year of service and attainment of
age 21.

The plans provide defined benefits based on years of
credited service and either final average earnings (salaried
employees), hourly job rates or specified benefit rates
(hourly and union employees).

U.S. Defined Benefit Plans

International Paper makes contributions that are sufficient

to fully fund its actuarially determined costs, generally
equal to the minimum amounts required by the Employee
Retirement Income Security Act (ERISA).

Net periodic pension income for qualified and nonquali-

fied defined benefit plans comprised the following:

In millions
_____________________________
Service cost
Interest cost
Expected return on plan assets
Amortization of net transition asset (1)
Actuarial gains and losses
Amortization of prior service cost
Curtailment gain
Net periodic pension income

1999
______
$(101)
(303)
469

(6)
(16)
6
______
$ 49
______
______

1998
______
$ (97)
(297)
455
26
(3)
(12)
5
______
$
77
______
______

1997
______
$ (90)
(280)
418
26
(1)
(10)
______
$
63
______
______

The following table presents the changes in benefit oblig-

ation and plan assets for 1999 and 1998 and the plans’
funded status and amounts recognized in the consolidated
balance sheet as of December 31, 1999 and 1998.

1999
_______

1998
_______

In millions
_______________________________
Change in benefit obligation:
Benefit obligation, January 1
Service cost
Interest cost
Participants’ contributions
Actuarial (gain) loss
Benefits paid
Acquisitions
Divestitures
Curtailment gain
Special termination benefits
Plan amendments
Benefit obligation, December 31 (1)

Change in plan assets:
Fair value of plan assets, January 1
Actual return on plan assets
Company and participants’ contributions
Benefits paid
Acquisitions
Divestitures
Fair value of plan assets, December 31

Funded status (2)
Unrecognized actuarial (gain) loss
Unamortized prior service cost
Unrecognized net transition obligation

Prepaid benefit cost

$4,492
101
303

(439)
(322)

(10)
92
106
______
$ 4,323
______
______

$ 4,942
950
42
(322)

______
$ 5,612
______
______
$ 1,289
(615)
183
2
______
$ 859
______
______

$ 3,928
92
285
1
393
(258)
53
(23)

11
10
______
$ 4,492
______
______

$ 4,684
436
20
(258)
85
(25)
______
$ 4,942
______
______
$ 450
322
87
3
______
$ 862
______
______

$ 959
(129)
19

13
______
$ 862
______
______

(1) Includes nonqualified unfunded plans with projected benefit obligations of $110

million and $125 million at December 31, 1999 and 1998, respectively.

(2) The Union Camp and Alling and Cory domestic qualified pension plans were
merged with the International Paper domestic qualified pension plan effective
September 30, 1999. The funded status information for 1999 reflects this merger.
Prior to the plan merger, the Union Camp domestic qualified hourly plan had an
accumulated benefit obligation in excess of the fair value of plan assets. As of
December 31, 1998, the projected benefit obligation, accumulated benefit obliga-
tion and fair value of plan assets for the Union Camp hourly plan were $290 mil-
lion, $290 million and $269 million, respectively.

(1) Amortization of International Paper’s net transition asset, which increased annual

periodic pension income, was completed in 1999.

Amounts recognized in the consolidated

balance sheet consist of:

Prepaid benefit cost
Accrued benefit liability
Intangible asset
Minimum pension liability adjustment
included in accumulated other
comprehensive income

$ 928
(85)
6

10
______
$ 859
______
______

Net amount recognized

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

a before-tax basis to substantially all of these plans.
As determined by the provisions of each plan,

International Paper matches the employees’ basic voluntary
contributions. Such matching contributions to the plans
were approximately $67 million, $58 million and $56 mil-
lion for the plan years ending in 1999, 1998 and 1997,
respectively. The net assets of these plans approximated $3.4
billion as of the 1999 plan year-end.

NOTE 17 POSTRETIREMENT BENEFITS

International Paper provides certain retiree health care and
life insurance benefits covering a majority of U.S. salaried
and certain hourly employees. Employees are generally eligi-
ble for benefits upon retirement and completion of a speci-
fied number of years of creditable service. An amendment in
1992 to one of the plans limits the maximum annual com-
pany contribution for health care benefits for retirees after
January 1, 1992, based on age at retirement and years of ser-
vice after age 50. Amortization of this plan amendment,
which reduced annual net postretirement benefit cost, was
completed in 1999. International Paper does not prefund
these benefits and has the right to modify or terminate cer-
tain of these plans in the future.

The components of postretirement benefit expense in

1999, 1998 and 1997 were as follows:

In millions
____________________________
Service cost
Interest cost
Actuarial gains and losses
Amortization of prior service cost
Net postretirement benefit cost

1999
_____
$ 11
30
2
(12)
_____
$ 31
_____
_____

1998
_____
11
$
33
1
(21)
_____
$ 24
_____
_____

1997
_____
11
$
33
1
(21)
_____
$
24
_____
_____

Included in the 1999 special charge was $92 million for
special termination benefits attributable to the elimination
of approximately 1,171 positions in connection with an
employee integration benefits program provided to employ-
ees whose jobs were eliminated as a result of the merger of
International Paper and Union Camp.

Included in the 1998 special charge was $11 million for
special termination benefits attributable to the elimination
of approximately 540 positions in connection with a Union
Camp employee severance program.

Plan assets are held in master trust accounts and include

investments in International Paper common stock in the
amounts of $401 million and $432 million at December 31,
1999 and 1998, respectively.

Weighted average assumptions as of December 31, 1999,

1998 and 1997 were as follows:

Discount rate
Expected long-term return on

1999
______
7.75%

1998 (1,2) 1997 (2)
______
______
7.20%
6.60%

plan assets

Rate of compensation increase

10.00%
5.00%

9.90%
4.20%

9.90%
4.60%

(1) As of June 1, 1999 International Paper enhanced pension benefits for its major
union groups. As a result, the pension plan was revalued. The revaluation
assumed a discount rate of 7.25% and a rate of compensation increase of 4.5%.
These actions had the net effect of reducing the pension benefit obligation by
$179 million.

(2) The 1998 and 1997 rates are a blended average of the Union Camp and

International Paper plan assumptions. The International Paper discount rate,
expected long-term return on plan assets and rate of compensation increase for
1998 was 6.5%, 10.0% and 4.0%, respectively. For 1997 the respective rates were
7.25%, 10.0% and 4.5%.

Non-U.S. Defined Benefit Plans

Generally, our non-U.S. pension plans are funded using
the projected benefit as a target, except in certain countries
where funding of benefit plans is not required. Net periodic
pension expense for our non-U.S. plans was not significant
for 1999, 1998 and 1997.

The plans’ projected benefit obligation in excess of plan
assets at fair value at December 31, 1999 and 1998 was $43
million and $66 million, respectively. Plan assets are com-
posed principally of common stocks and other fixed income
securities.

Other Plans

We sponsor several defined contribution plans to provide
substantially all U.S. salaried and certain hourly employees
of International Paper an opportunity to accumulate person-
al funds for their retirement. Contributions may be made on

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

The following table presents the plans’ funded status as of
December 31, 1999 and 1998 and changes in benefit oblig-
ation and plan assets for 1999 and 1998.

Included in the 1998 special charge was $3 million for
special termination benefits attributable to the elimination
of approximately 540 positions in connection with a Union
Camp employee severance program.

In millions
_______________________________
Change in benefit obligation:
Benefit obligation, January 1
Service cost
Interest cost
Participants’ contributions
Actuarial loss (gain)
Benefits paid
Plan amendments
Acquisitions
Curtailment loss (gain)
Special termination benefits
Benefit obligation, December 31

Change in plan assets:
Fair value of plan assets, January 1
Company contributions
Participants’ contributions
Benefits paid
Fair value of plan assets, December 31

Funded status
Unamortized prior service cost
Unrecognized actuarial loss
Prepaid (accrued) benefit cost

1999
______

1998
______

$ 503
11
30
16
(66)
(44)
(15)

4
7
______
$ 446
______
______

-
28
16
(44)
______
$
-
______
______

$ (446)
(47)
4
______
$ (489)
______
______

$ 489
11
33
15
(6)
(45)

3
______
$ 503
______
______

-
30
15
(45)
______
$
-
______
______

$ (503)
(39)
58
______
$ (484)
______
______

Future benefit costs were estimated assuming medical
costs would increase at a 7.25% annual rate, decreasing to a
5% annual growth rate ratably over the next four years and
then remaining at a 5% annual growth rate thereafter. A 1%
increase in this annual trend rate would have increased the
accumulated postretirement benefit obligation at December
31, 1999 by $21 million. A 1% decrease in the annual trend
rate would have decreased the accumulated postretirement
benefit obligation at December 31, 1999 by $18 million.
The effect on net postretirement benefit cost from a 1%
increase or decrease would not be material. The weighted
average discount rate used to estimate the accumulated
postretirement benefit obligation at December 31, 1999 was
7.75% compared with 6.60% at December 31, 1998.

Included in the 1999 special charge was $7 million for
special termination benefits attributable to the elimination
of approximately 313 positions in connection with an inte-
gration benefits program provided to employees whose jobs
were eliminated as a result of the merger of International
Paper and Union Camp.

NOTE 18 INCENTIVE PLANS

International Paper currently has a Long-Term Incentive
Compensation Plan that includes a Stock Option Plan, a
Restricted Performance Share Plan and an Executive
Continuity Award Plan, administered by a committee of
nonemployee members of the Board of Directors who are
not eligible for awards. The Plan allows stock appreciation
rights to be awarded, although none were outstanding at
December 31, 1999 or 1998. We also have other perfor-
mance-based restricted share/unit plans available to senior
executives and directors.

We apply the provisions of Accounting Principles Board

Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for
our plans and the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). Accordingly,
no compensation cost has been recognized for the stock
option plan. Had compensation cost for our stock-based
compensation plans been determined consistent with the
provisions of SFAS No. 123, our net earnings, earnings per
common share and earnings per common share - assuming
dilution would have been reduced to the pro forma amounts
indicated below:

In millions, except per share amounts
____________________________
Net Earnings (Loss)
As reported
Pro forma

Earnings (Loss) Per Common Share
As reported
Pro forma

Earnings (Loss) Per Common Share -
Assuming Dilution
As reported
Pro forma

1999
_____

1998
_____

1997
_____

$ 183
152

$ 247
223

$ (80)
(108)

$ 0.44
0.37

$ 0.60
0.54

$ (0.20)
(0.27)

$ 0.44
0.37

$ 0.60
0.54

$ (0.20)
(0.27)

The effect on 1999, 1998 and 1997 pro forma net earn-
ings, earnings per common share and earnings per common
share - assuming dilution of expensing the estimated fair
value of stock options is not necessarily representative of the
effect on reported earnings for future years due to the vest-

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

ing period of stock options and the potential for issuance of
additional stock options in future years.

Stock Option Plan

Under the current plan officers and certain other employ-
ees may be granted options to purchase International Paper
common stock. The option price is the market price of the
stock at the date of grant. Options are immediately exercis-
able under the plan; however, the underlying shares cannot
be sold and carry profit forfeiture provisions during the ini-
tial two years following grant. Upon exercise of an option, a
replacement option may be granted with the exercise price
equal to the current market price and with a term extending
to the expiration date of the original option.

For purposes of the pro forma disclosure above the fair
value of each option grant has been estimated on the date of
the grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants
in 1999, 1998 and 1997, respectively:

Initial Options (1)
Risk-Free Interest Rate
Price Volatility
Dividend Yield
Expected Term in Years

Replacement Options (2)
Risk-Free Interest Rate
Price Volatility
Dividend Yield
Expected Term in Years

1999
_____

1998
_____

1997
_____

6.14%
5.05%
4.78%
33.00% 29.28% 26.46%
2.77%
2.38%
2.08%
5.13
5.31
4.39

6.31%
5.51%
5.47%
33.00% 31.09% 29.50%
2.31%
2.17%
2.05%
2.22
2.12
2.09

(1) The average fair values of initial option grants during 1999, 1998 and 1997 were

$13.14, $10.83 and $10.69, respectively.

(2) The average fair values of replacement option grants during 1999, 1998 and 1997

were $10.14, $9.40 and $9.04, respectively.

A summary of the status of the Stock Option Plan as of
December 31, 1999, 1998 and 1997 and changes during the
years ended on those dates is presented below:

Options (1,2)
__________
17,066,505
Outstanding at January 1, 1997
6,889,324
Granted
(5,005,818)
Exercised
(605,679)
Forfeited
(220,248)
Expired
__________
Outstanding at December 31, 1997 18,124,084
4,820,970
Granted
(3,314,612)
Exercised
(789,621)
Forfeited
(154,915)
Expired
__________
Outstanding at December 31, 1998 18,685,906
4,521,627
Granted
(6,531,818)
Exercised
(522,214)
Forfeited
Expired
(354,566)
__________
Outstanding at December 31, 1999 15,798,935
__________
__________

Weighted
Average
Exercise
Price
_________
34.26
$
44.55
34.17
35.99
42.56
_________
38.03
42.96
35.85
42.82
49.97
_________
39.39
49.76
36.56
42.91
51.41
_________
43.14

(1) The table does not include Executive Continuity Award tandem options described
below. No fair value is assigned to these options under SFAS No. 123. The tandem
restricted shares accompanying these options are expensed over their vesting period.

(2) The table does include options outstanding under two acquired company plans

under which options may no longer be granted.

The following table summarizes information about stock

options outstanding at December 31, 1999:

Outstanding and Exercisable
_________________________________
Weighted Weighted
Average
Average
Options
Exercise
Remaining
Price
Outstanding
Life
__________ ________ ________
$ 32.29
3,415,956
$ 40.29
4,187,083
$ 44.54
3,578,837
$ 49.74
2,112,332
$ 55.15
2,504,727

5.5
6.9
7.5
4.7
3.2

Range of Exercise Prices
__________________________
$22.68 - $38.50
$38.62 - $41.94
$41.98 - $46.00
$46.06 - $52.25
$52.37 - $59.94

Performance - Based Restricted Shares

Under the Restricted Performance Share Plan, contingent
awards of International Paper’s common stock are granted by
the Committee. Awards are earned on the basis of
International Paper’s financial performance over a period of
consecutive calendar years as determined by the Committee.
A majority of the awards under the Restricted Performance
Share Plan in effect at the beginning of 1999 have been can-

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

At December 31, 1999 and 1998, a total of 30.1 million
and 4.6 million shares, respectively, were available for grant
under the Long-Term Incentive Compensation Plan. In
1999, shareholders approved an additional 25.5 million
shares to be made available for grant, with 3 million of
these shares reserved specifically for the granting of restrict-
ed stock. A total of 4.2 million shares remain available for
the granting of restricted stock as of December 31, 1999.

The compensation cost that has been charged to earnings

for the performance-based plans was $3 million, $15 mil-
lion and $14 million for 1999, 1998 and 1997, respectively.
Our 1999 earnings included income of $20 million recog-
nized upon cancellation of a majority of the awards under
the Restricted Performance Share Plan.

NOTE 19 SUBSEQUENT EVENTS

The sale for just over $1.2 billion of Carter Holt Harvey’s
equity interest in COPEC closed on January 3, 2000. Also,
the sale for $79 million of our equity interest in Scitex was
completed on January 6, 2000. These transactions resulted
in an after-tax profit of about $135 million or $.33 per
share which will be recorded as an extraordinary item, pur-
suant to the pooling-of-interests rules, in the first quarter of
2000.

On February 17, 2000, International Paper announced
that we had reached an agreement to acquire Shorewood
Packaging Corporation, a leader in the premium retail pack-
aging market, for $600 million in cash and the assumption
of $275 million of debt.

On February 21, 2000, Carter Holt Harvey announced
the purchase of CSR Limited’s medium density fiberboard
and particleboard businesses and its Oberon sawmill for
approximately $207 million in cash.

celled. Prior to the amended plan which is expected to com-
mence in 2001, a one-time Transitional Performance Unit
Plan was implemented effective July 1, 1999, which pro-
vides a cash award upon successful achievement of pre-
established performance criteria.

The following summarizes the activity of all perfor-
mance-based plans for the three years ending December 31,
1999:

Outstanding at January 1, 1997
Granted
Issued
Forfeited
Outstanding at December 31, 1997
Granted
Issued
Forfeited
Outstanding at December 31, 1998
Granted
Issued
Forfeited (1)
Outstanding at December 31, 1999

Shares
________
1,037,061
284,547
(120,187)
(40,352)
________
1,161,069
330,656
(156,935)
(50,100)
________
1,284,690
95,035
(227,553)
(1,067,153)
________
85,019
________
________

(1) Includes 974,734 shares forfeited under the Restricted Performance Share Plan.

Executive Continuity Award Plan

The Executive Continuity Award Plan provides for the
granting of tandem awards of restricted stock and/or non-
qualified stock options to key executives. Grants are
restricted and awards conditioned on attainment of specified
age and years of service requirements. Exercise of a tandem
stock option results in the cancellation of the related
restricted shares.

The following summarizes the activity of the Executive
Continuity Award Plan for the three years ending December
31, 1999:

Outstanding at January 1, 1997
Granted
Issued

Outstanding at December 31, 1997
Granted
Issued
Forfeited

Outstanding at December 31, 1998
Granted
Issued
Forfeited (1)
Outstanding at December 31, 1999

Shares
_______
483,650
106,108
(9,500)
_______
580,258
24,000
(5,500)
(5,000)
_______
593,758
71,900
(65,412)
(89,390)
_______
510,856
_______
_______

(1)

Includes restricted shares cancelled when tandem stock options were exercised.
In 1999, 440,000 tandem stock options were exercised.

I N T E R N A T I O N A L P A P E R

S I X - Y E A R F I N A N C I A L S U M M A R Y
Dollar amounts in millions, except per share amounts and stock prices
1994
1999
______________________________________________________________________________________________________________

1997

1996

1998

1995

Results of Operations
Net sales
Costs and expenses, excluding interest
Earnings before income taxes, minority
interest, extraordinary item and
cumulative effect of accounting changes
Minority interest expense, net of taxes
Extraordinary item
Cumulative effect of accounting changes
Net earnings (loss)
Earnings (loss) applicable to common shares

Financial Position
Working capital
Plants, properties and equipment, net
Forestlands
Total assets
Long-term debt
Common shareholders’ equity

Per Share of Common Stock -
Assuming No Dilution (7)
Earnings (loss) before extraordinary item
and cumulative effect of accounting changes
Extraordinary item
Cumulative effect of accounting changes
Earnings (loss)
Cash dividends
Common shareholders’ equity

Common Stock Prices (7)
High
Low
Year-end

Financial Ratios
Current ratio
Total debt to capital ratio
Return on equity
Return on investment

Capital Expenditures

Number of Employees

$24,573
23,620

$23,979
23,039

$ 24,556
23,976

$ 24,182
23,193

$ 24,140
20,791

$ 18,469
17,150

448 (1)
163 (1)
16

429 (2)
87 (2)

143 (3)
140 (3)

939 (4)
180 (4)

2,742
166

896 (5)
54

183 (1)
183 (1)

_______

247 (2)
247 (2)

______

(80) (3)
(80) (3)

_______

379 (4)
379 (4)

_______

$ 2,859
14,381
2,921
30,268
7,520
10,304
_______

$ 2,675
15,320
3,093
31,466
7,697
10,738
______

$ 1,476
15,707
3,273
31,971
8,521
10,647
_______

454
16,570
3,637
33,357
7,943
11,349
_______

1,595
1,595
_______

$ 1,471
14,347
3,030
28,838
7,144
9,837
_______

(79)
461 (5)
461 (5)

_______

856
12,546
1,009
22,624
5,716
8,280
_______

$ 0.48
(0.04)

0.44
1.01
24.95
_______

59 1/2
39 1/2
56 7/16
_______

1.7
38.1
1.7(1,6)
2.6(1,6)
_______

$ 1,139
_______

98,700
_______
_______

0.60

(0.20)

0.95

4.41

$ 1.52

0.60
1.05
26.13
______

55 1/4
35 1/2
44 13/16
______

1.6
39.0
2.3(2,6)
2.5(2,6)
______

$ 1,322
______

98,300
______
______

(0.20)
1.05
26.18
_______

61
38 5/8
43 1/8
_______

1.3
46.1
(0.7)(3,6)
1.5 (3,6)
_______

$ 1,448
_______

100,900
_______
_______

0.95
1.05
28.57
_______

44 5/8
35 5/8
40 1/2
_______

1.1
45.6
3.4(4)
3.3(4)
_______

$ 1,780
_______

106,300
_______
_______

4.41
0.98
27.20
_______

45 3/4
34 1/8
37 7/8
_______

1.3
43.7
17.6
9.0
_______

$ 1,785
_______

99,800
_______
_______

(0.22)
1.30
0.90
23.34
_______

40 1/4
30 3/8
37 3/4
_______

1.2
48.6
5.7 (5)
4.1(5)
_______

$ 1,439
_______

88,900
_______
_______

I N T E R N A T I O N A L

P A P E R

to our share of charges taken by Scitex, a 13% investee
company, for the write-off of in-process research and
development related to an acquisition and costs to exit
the digital video business.

(3) Includes a pre-tax business improvement charge of $535

million ($385 million after taxes), a $150 million pre-
tax provision for legal reserve ($93 million after taxes), a
pre-tax charge of $125 million ($80 million after taxes)
for anticipated losses associated with the sale of the
Imaging businesses, and a pre-tax gain of $170 million
($97 million after taxes and minority interest expense)
from the redemption of certain retained west coast part-
nership interests and the release of a related debt guar-
anty.

(4) Includes a pre-tax restructuring and asset impairment
charge of $554 million ($386 million after taxes), a
$592 million pre-tax gain on the sale of a west coast
partnership interest ($336 million after taxes and
minority interest expense), a $155 million pre-tax
charge ($99 million after taxes) for the write-down of
the investment in Scitex and a $10 million pre-tax
charge ($6 million after taxes) for our share of a restruc-
turing charge announced by Scitex in November 1996.

(5) Includes $17 million ($10 million after taxes) of addi-
tional earnings related to the change in accounting for
start-up costs.

(6) Return on equity was 5.2% and return on investment

was 4.0% in 1999 before special items. Return on equi-
ty was 3.2% and return on investment was 2.8% in
1998 before special items. Return on equity was 3.4%
and return on investment was 3.0% in 1997 before spe-
cial items.

(7) Per share data and common stock prices have been
adjusted to ref lect a two-for-one stock split in
September 1995. All per share amounts are computed
before the effects of dilutive securities.

F I N A N C I A L G L O S S A R Y

Current ratio -

current assets divided by current liabilities.

Total debt to capital ratio -

long-term debt plus notes payable and current maturities
of long-term debt divided by long-term debt, notes
payable and current maturities of long-term debt, minori-
ty interest, preferred securities and total common share-
holders’ equity.
Return on equity -

net earnings divided by average common shareholders’
equity (computed monthly).

Return on investment -

net earnings plus after-tax interest expense and minority
interest expense divided by an average of total assets
minus accounts payable and accrued liabilities.

F O O T N O T E S T O S I X - Y E A R F I N A N C I A L S U M M A R Y

(1) Includes a $148 million pre-tax charge ($97 million

after taxes) for Union Camp merger-related termination
benefits, a $107 million pre-tax charge ($78 million
after taxes) for one-time merger expenses, a $298 mil-
lion pre-tax charge ($180 million after taxes and minor-
ity interest expense) for asset shutdowns of excess inter-
nal capacity and cost reduction actions, a $10 million
pre-tax charge ($6 million after taxes) to increase exist-
ing environmental remediation reserves related to cer-
tain former Union Camp facilities, a $30 million pre-tax
charge ($18 million after taxes) to increase existing legal
reserves and a $36 million pre-tax credit ($27 million
after taxes) for the reversal of reserves that were no
longer required.

(2) Includes a $20 million pre-tax gain ($12 million after

taxes) on the sale of the Veratec nonwovens business, an
$83 million pre-tax gain ($50 million after taxes) from
the reversal of previously established reserves that are no
longer required, a $111 million pre-tax charge ($68 mil-
lion after taxes) for the impairment of oil and gas
reserves due to low prices, a $145 million pre-tax
restructuring and asset impairment charge ($82 million
after taxes and minority interest expense) and $16 mil-
lion of pre-tax charges ($10 million after taxes) related

I N T E R N A T I O N A L P A P E R

I N T E R I M F I N A N C I A L R E S U L T S ( U N A U D I T E D )
In millions, except per share amounts and stock prices

1 9 9 9

Net Sales

Gross Margin (1)

Earnings (Loss) Before Income Taxes,

Minority Interest and Extraordinary Item

Net Earnings (Loss)

Per Share of Common Stock

Earnings (Loss)

Earnings (Loss) - Assuming Dilution

Dividends
Common Stock Prices

High

Low

1 9 9 8

Net Sales

Gross Margin (1)

Earnings (Loss) Before Income Taxes

and Minority Interest

Net Earnings (Loss)

Per Share of Common Stock

Earnings (Loss)

Earnings (Loss) - Assuming Dilution

Dividends

Common Stock Prices

High

Low

_______________________________________

Quarter

First
_______

Second
_______

Third
________

Fourth
________

Year
_______

$ 6,032

1,456

$ 5,996

1,576

$ 6,251

1,658

$ 6,294

$ 24,573

1,778

6,468

0.08

0.26

47 1/4

39 1/2

$ 6,006

1,558

185

100

0.25

0.26

52 5/8

40 7/8

(36) (2)
(71) (2)

$ (0.17)

(0.17)

0.25

59 1/2

42 11/16

$ 5,833

1,509

242 (3)
142 (3)

0.34

0.25

56 1/16

46 15/16

148 (4)
80 (4)

448 (2,3,4)
183 (2,3,4)

0.19

0.25

57 11/16

43 9/16

0.44

1.01

59 1/2

39 1/2

$ 6,032

1,464

$ 6,108

1,524

$ 23,979

6,055

171 (5)
103 (5)

(17) (6)
(2) (6)

90 (7)
46 (7)

429 (5,6,7)
247 (5,6,7)

0.25

0.26

55 1/4

42 1/2

(0.01)

0.26

49 3/8

35 1/2

0.11

0.27

49 3/16

40 3/16

0.60

1.05

55 1/4

35 1/2

(1) Gross margin represents net sales less cost of products sold.
(2)

Includes a $98 million pre-tax charge ($67 million after taxes) for Union Camp merger-related termination benefits, a $59 million pre-
tax charge ($49 million after taxes) for one-time merger expenses, a $113 million pre-tax charge ($69 million after taxes) for asset shut-
downs of excess internal capacity and cost reduction actions and a $36 million pre-tax credit ($27 million after taxes) for the reversal of
reserves that were no longer required.
Includes a $50 million pre-tax charge ($30 million after taxes) for Union Camp merger-related termination benefits, an $18 million pre-
tax charge ($11 million after taxes) for one-time merger expenses and a $10 million pre-tax charge ($6 million after taxes) to increase
existing environmental remediation reserves related to certain former Union Camp facilities.
Includes a $185 million pre-tax charge ($111 million after taxes and minority interest expense) for asset shutdowns of excess internal
capacity and cost reduction actions, a $30 million pre-tax charge ($18 million after taxes) for one-time merger expenses and a $30 mil-
lion pre-tax charge ($18 million after taxes) to increase existing legal reserves.
Includes a $6 million pre-tax charge ($4 million after taxes) recorded to write off in-process research and development costs related to an
acquisition by Scitex, a 13% owned investee company.
Includes special items totaling a pre-tax loss of $145 million ($82 million after taxes and minority interest expense). These special items
include a $10 million pre-tax charge ($6 million after taxes) related to our share of a restructuring charge taken by Scitex. The Scitex
charge is reflected as an equity loss from the investment in Scitex in the consolidated statement of earnings.
Includes a $56 million pre-tax oil and gas impairment charge ($35 million after taxes) and a $38 million pre-tax credit ($23 million
after taxes) from the reversal of reserves that were no longer required.

(3)

(4)

(5)

(6)

(7)

S H A R E H O L D E R I N F O R M A T I O N

C O R P O R A T E H E A D Q U A R T E R S
International Paper
Two Manhattanville Road
Purchase, NY 10577
914-397-1500

A N N U A L M E E T I N G
The next annual meeting of shareholders will be held at
8:30 a.m., Tuesday, May 9, 2000 at the Manhattanville
College, Purchase, New York.

T R A N S F E R A G E N T
For services regarding your account such as change of address,
lost certificates or dividend checks, change in registered owner-
ship, or the dividend reinvestment program, write or call:

ChaseMellon Shareholder Services L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
800-678-8715

S T O C K E X C H A N G E L I S T I N G S
Common shares (symbol: IP) are traded on the following
exchanges: New York, Basel, Geneva, Lausanne, Zurich and
Amsterdam. International Paper options are traded on the
Chicago Board of Options Exchange.

D I R E C T P U R C H A S E P L A N
Under our plan you may invest all or a portion of your divi-
dends, and you may purchase up to $20,000 of additional
shares each year. International Paper pays most of the bro-
kerage commissions and fees. You may also deposit your cer-
tificates with the transfer agent for safekeeping. For a copy
of the plan prospectus, call or write to the Corporate
Secretary at corporate headquarters.

I N D E P E N D E N T P U B L I C A C C O U N T A N T S
Arthur Andersen LLP
1345 Avenue of the Americas
New York, NY 10105

R E P O R T S A N D P U B L I C A T I O N S
Additional copies of this annual report, the most recent
environment, health and safety annual report, SEC filings
and other publications are available by calling 914-397-1522
or writing to the investor relations department at corporate
headquarters. Additional information is also available on
our website –http://www.internationalpaper.com

I N V E S T O R R E L A T I O N S
Investors desiring further information about International
Paper should contact the investor relations department at
corporate headquarters, 914-397-1625.

C R E D I T S
Papers used in this report–Cover: Zanders Mega Dull 80 lb.
cover; pages 1-4, Zanders Mega Dull 80 lb. text; pages 5-
64, Beckett Expression, Radiance, 70 lb. text.

Designed by Pentagram New York and Dick Pepper & Mike
Coulson. Printed by The Hennegan Company. Major pho-
tography by Jack Kenner. Photo of Mr. Dillon by Keith
Renard.

Products and brand designations appearing in italics are
trademarks of International Paper or a related company.

On our cover: Kristen Henderson enjoys a
beautiful day on her new bicycle. The bicycle packaging was
specially designed and manufactured by employees at our
Fond du Lac, Wis., Edinburg, Texas, and Putnam, Conn.,
container facilities. Henderson, who also appears in
International Paper television commercials, is the daughter of
employee Maureen Henderson, senior financial
analyst, in Tuxedo, N.Y. Kristen and Maureen are featured
on the cover of our Conversation About the Future brochure.

D I R E C T O R S A N D S E N I O R M A N A G E M E N T

D I R E C T O R S

P E T E R I . B I J U R 1 4 7 *
Chairman and
Chief Executive Officer
Texaco, Inc.

J O H N T. D I L L O N 2 * 3
Chairman and
Chief Executive Officer
International Paper

R O B E R T J . E A T O N 4 * 5
Chairman of the
Board of Management
DaimlerChrysler AG

S A M I R G . G I B A R A 1 5
Chairman and
Chief Executive Officer
The Goodyear Tire &
Rubber Company

JAMES A. HENDERSON 1 4
Former Chairman and
Chief Executive Officer
Cummins Engine Company

J O H N R . K E N N E D Y 5 7
Former President and
Chief Executive Officer
Federal Paper Board Company, Inc.

R O B E R T D . K E N N E D Y 3 4
Former Chairman and
Chief Executive Officer
Union Carbide Corporation

W . C R A I G M C C L E L L A N D 3 6
Former Chairman and
Chief Executive Officer
Union Camp Corporation

D O N A L D F. M C H E N R Y 1 2 4 5 *
Distinguished
Professor of Diplomacy
Georgetown University

1 Audit Committee
2 Executive Committee
3 Finance Committee
4 Management Development and

Compensation Committee

5 Governance Committee
6 Public and Legal Affairs Committee
7 Environment, Health and
Technology Committee
* Committee Chairperson

P A T R I C K F. N O O N A N 6 * 7
Chairman and
Chief Executive Officer
The Conservation Fund

J A N E C . P F E I F F E R 1 * 3 6
Management Consultant

J E R E M I A H J . S H E E H A N 6 7
Chairman and
Chief Executive Officer
Reynolds Metals Company

C H A R L E S R . S H O E M A T E 2 3 * 4 5
Chairman, President and
Chief Executive Officer
Bestfoods

C . W E S L E Y S M I T H 6 7
Executive Vice President
International Paper

S E N I O R M A N A G E M E N T

J O H N T. D I L L O N
Chairman and
Chief Executive Officer

D A V I D W . O S K I N
Executive Vice President

C . W E S L E Y S M I T H
Executive Vice President

J A M E S P. M E L I C A N
Executive Vice President
Legal and External Affairs

M A R I A N N E M . P A R R S
Executive Vice President
Administration

R O B E R T M . A M E N
President
International Paper
Europe

J E R O M E N . C A R T E R
Senior Vice President
Human Resources

T H O M A S E . C O S T E L L O
Senior Vice President
Distribution

J O H N V. F A R A C I
Senior Vice President
Finance &
Chief Financial Officer

C H A R L E S H . G R E I N E R
Senior Vice President
Printing & Communications Papers

N E W L A N D L E S K O
Senior Vice President
Industrial Packaging

W I L L I A M B . L Y T T O N
Senior Vice President
& General Counsel

R I C H A R D B . P H I L L I P S
Senior Vice President
Technology

W I L L I A M H . S L O W I K O W S K I
Senior Vice President
Consumer Packaging

M A N C O S N A P P
Senior Vice President
Building Materials

D E N N I S T H O M A S
Senior Vice President
Public Affairs and Communications

D A V I D A . B A I L E Y
Managing Director
European Papers, East

J O H N N . B A L B O N I
Vice President
E-commerce

M I C H A E L J . B A L D U I N O
Vice President
Foodservice

H . W A Y N E B R A F F O R D
Vice President
Converting & Specialty Papers

E . W I L L I A M B O E H M L E R
Vice President and Treasurer

D E N N I S J . C O L L E Y
Vice President
Retail Packaging

W I L L I A M P. C R A W F O R D
Vice President
Logistics

H A N S P E T E R D A R O C Z I
Vice President
International Container

C . C A T O E A L Y
Vice President
Business Development
and Planning

J O H N V. F L Y N N
Vice President
Human Resources

T H O M A S E . G E S T R I C H
Vice President
Beverage Packaging

J A M E S W . G U E D R Y
Vice President and
Corporate Secretary

P A U L H E R B E R T
Managing Director
European Papers, West

W I L L I A M P. H O E L
Vice President
Executive Assistant to the Chairman

N E W E L L E . H O L T
Vice President
Bleached Board

R O B E R T M . H U N K E L E R
Vice President
Investments

T H O M A S C . J O R L I N G
Vice President
Environmental Affairs

D I R E C T O R S A N D S E N I O R M A N A G E M E N T

J E F F R E Y F. K A S S
Vice President
Printing & Communications Papers

D A V I D L . R O B I N S O N
Vice President
Industrial Packaging

R . M I C H A E L R O S S
Vice President
Industrial Packaging

J . C H R I S S C A L E T
Vice President and
Chief Information Officer

B E N N I E R . S M I T H
Vice President
Industrial Packaging

P E T E R M . S P R I N G F O R D
President
International Paper Company (Asia)
Limited

L A R R Y J . S T O W E L L
Vice President
Arizona Chemical

T O B I N J . T R E I C H E L
Vice President
Tax

C A R O L S . T U T U N D G Y
Vice President
Investor Relations

L Y N M . W I T H E Y
Vice President
Public Affairs

R I C H A R D A . O ’ L E A R Y
Auditor

T I M O T H Y P. K E N E A L L Y
Vice President
Industrial Packaging

P E T E R F. L E E
Vice President
Research & Development

A N D R E W R . L E S S I N
Vice President and Controller

A R T H U R W . M C G O W E N
Vice President
Wood Products

G E R A L D C . M A R T E R E R
Vice President
Specialty Industrial Papers

J E A N - P H I L L I P P E M O N T E L
Vice President
European Papers

K A R L W . M O O R E
Director
Finance, IP Europe

G E O R G E A . O ’ B R I E N
Vice President
Forest Resources

M A X I M O P A C H E C O
President
International Paper Latin America

L H P U C K E T T
Vice President
Commercial Printing & Office Papers

C A R O L L . R O B E R T S
Vice President
People Development

Two Manhattanville Road
Purchase, NY 10577-2196
914-397-1500
www.internationalpaper.com

Equal Opportunity Employer (M/F/D/V)